What is an "unjustifiable" bonus exactly?
As you may be aware, the FSA has acquired a new weapon in its fight against the scourge that is bonuses: the ability to render contracts null and void if they confer entitlement to bonuses that are "unjustifiable," or, "that would cause instability."
The latest move comes despite various cogently argued assaults on the idea that bonuses were directly responsible for the financial crisis in the first place.
The new armoury is going to be announced in the Queen's speech and won't become law until early next year, so won't affect this year's bonus round. Thereafter, any contracts which don't adhere to the FSA's remuneration code or (we suspect) the commands of the Treasury, will be shredded.
In order to be amenable to the FSA's code, bonuses must -
- NOT be guaranteed over multiple years
- NOT be based purely on current year revenues rather than risk adjusted profit
- NOT be paid out mostly in cash, with no deferment
- Be liable to being clawed back if circumstances change
- Be based to some degree on "non financial measures of performance" (eg. Risk and compliance)
And in order to comply with the Treasury's wishes, they must also -
- Be subject to a 40-60% deferral over a minimum of three years
- Be comprised of at least 50% equity
The rules are bad news for anyone on multi-year guarantees negotiated this year. Once the new law has been passed, it's possible these will all be voided.
They are, however, good news for Deutsche Bank, which as we have pointed out previously, is immune to the dictates of the FSA because it operates in the UK under the EU's 'passporting' scheme. Most US banks in the UK fall under the remit of the FSA because they (currently) have European subsidiaries based in London. This may soon change.
In the meantime, compensation consultants warn of the perils of trying to void contracts already in existence: "Any retrospective application will have significant employment and contract law issues and may be very difficult indeed to apply," says Jon Terry, head of the compensation and benefits team at PricewaterhouseCoopers.
