Yesterday, in conjunction with the U.K. Treasury’s announcement regarding its Asset Protection Scheme (Scheme), the U.K.’s Financial Services Authority (FSA) published a draft to the code of practice that will form part of the eligibility criteria for participating in the Scheme. The specific principles of the code are:
- Boards and relevant remuneration committees should exercise independent judgment and demonstrate that their decisions are consistent with the firm's financial situation and future prospects.
- The procedures for setting compensation within the firm should be clear and documented, and they should include measures to avoid conflicts of interest. Risk and compliance functions should have significant input into setting compensation for business areas.
- Compensation for staff in the risk and compliance functions should be determined independently of the business areas. They should have different performance metrics, with greater emphasis on the achievement of their own objectives.
Measurement of performance for the calculation of bonuses
- Assessments of financial performance to calculate bonus pools should be principally based on profits. The bonus pool calculation should include an adjustment for current and future risk, and take into account the cost of capital employed and liquidity required.
- Firms should not assess performance solely on the results of the current financial year.
Measurement of performance for long-term incentive plans
- The measurement of performance for long term incentive plans, including those based on the performance of shares, should also be risk-adjusted.