Financial Sector Remuneration in the UK and the EU

by Morrison & Foerster LLP
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Banks’ business models involve taking on risk in return for reward, and they rely on the judgment of their officers and employees as to the appropriate types and levels of risk to take on. During the financial crisis, many institutions were shown to have taken on too much risk in certain areas and as a result, various principles were agreed by the G20 at its November 2008 summit in Washington, D.C. to make the financial sector more resilient to crises. Along with other principles designed to strengthen firms’ governance and risk management arrangements, the G20 resolved that firms should avoid compensation schemes which act as incentives for officers and employees to pursue short-term rewards at the expense of excessive and imprudent risk taking.

In April 2009, the Financial Stability Board (“FSB”) published its “Principles for Sound Compensation Practices” (the “FSB Principles”), designed to align compensation practices with prudent risk taking. The FSB Principles were endorsed later that month at the G20 London summit, while in September 20093 they were supplemented by implementation standards which were endorsed by the G20 Pittsburgh summit.4 At the Pittsburgh summit, the G20 called for certain principles to be observed by financial institutions in setting compensation policies (i) avoiding multi-year guaranteed bonuses, (ii) requiring a significant portion of variable compensation to be deferred, tied to performance, subjected to clawback and to vest in stock or other non-cash instruments, (iii) ensuring that compensation for senior executives and other significant employees is aligned with performance and risk, (iv) making the institution’s compensation principles transparent through disclosure, (v) limiting variable compensation as a percentage of the institution’s total net revenues, and (vi) ensuring the independence of the institution’s compensation committee.

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