On September 30, the UK Treasury announced that the UK government intends to implement the remuneration reforms agreed upon at the Group of Twenty’s Pittsburgh summit held on September 24 and 25. This was confirmed in a speech delivered by Prime Minister Gordon Brown in which he promised to implement legislation before the general election, which must be held no later than May 2010.
Key elements of the remuneration reforms include:
- requiring a significant portion of variable pay to be deferred, tied to performance and subject to appropriate clawback;
- prohibiting multi-year guaranteed bonuses;
- requiring significant financial institutions to have an independent board remuneration committee to exercise competent judgment on compensation policies and the incentives for managing risk, capital and liquidity, and to carry out an annual compensation compliance review to be submitted to the FSA;
- adding new disclosure requirements including (a) disclosure of aggregate information on the pay of senior executives and all employees whose actions have a material impact on the risk exposure of the bank; and (b) an annual report on compensation to shareholders, providing information to help shareholders hold boards accountable, such as the remuneration committee mandate, performance criteria and information on the linkage between pay and performance;
- limiting variable pay as a percentage of total net revenues so that banks have the ability to maintain a sound capital base over the long term, while managing the risks that arise if an organization cannot pay competitively to retain the right people;
- determining remuneration of risk management independently of other business areas; and
- mandating that failure to implement sound policies in line with the Financial Stability Board implementation standards will result in appropriate corrective measures by the UK Financial Services Authority to offset the extra risk, including requiring additional capital to be held.
Click here to read the UK Treasury press release.