The game changing clauses in the FSA's new compensation code

The FSA has released its compensation code.

In some ways it's good. Although 2,700 financial services firms in the UK are covered, they're divided into four tiers. While big investment banks and broker dealers will have to follow the rules fully, agency traders and building societies won't. Hedge funds may be able to avoid them too.

PARAGRAPH 19A 3.41

Buried deep within the new compensation code, however, is something which looks bad - particularly from a recruitment perspective.

Paragraph 19A.3.41 states:

A firm should not award, pay or provide guaranteed variable remuneration in the context of hiring new Remuneration Code staff ("X?) unless:

(a) it has taken reasonable steps to ensure that the remuneration is not more generous in either its amount or terms (including any deferral or retention periods) than the variable

remuneration awarded or offered by X?s previous employer;

This seems to suggest that if one bank is seeking to hire an individual from another bank, the hiring bank cannot offer the candidate a higher guaranteed bonus than he/she was making in his previous position.

PARAGRAPH 19A.343

Slightly further on, the code confirms that buybacks will also be outlawed.

From January 1st 2011, buybacks (AKA 'retention awards') to prevent existing staff defecting to competitors, will only be permissible when a 'major restructuring' is taking place. For a buyback to be allowed, the FSA will have to be notified in advance that a restructuring is taking place and that such a thing may be necessary.

Welcome to a world of salary inflation

The combined result of these two clauses will clearly be salary inflation. If an individual cannot be lured with a higher guaranteed bonus, he/she will come for a higher salary. And if someone cannot be bought back for a guaranteed bonus, he/she will succumb for a salary hike.

The idea is that you should not be offering anything more than the level of variable remuneration which the previous employer gave, "says Sam Whitaker, counsel in law firm Shearman & Sterling's executive compensation and employee benefits practice. " The only way you can give an uplift is in salary and that is clearly not attractive to many firms in the long term"

Whitaker also says that the CEBS bonus rules are arguably much more lenient regarding buybacks than the FSA's. "Whilst CEBS' wording also prohibits guaranteed bonuses for more than the first year it does not restrict the level of guaranteed bonuses to the same level as provided by the individual's previous employer" he says. "The FSA is also much more specific

about the use of retention bonuses during employment than CEBS."

This suggests that while firms in continental Europe may find ways of offering retention bonuses and bigger guarantees, UK-based firms probably won't.

This suggests that while firms in continental Europe may find ways of perpetuating buybacks without increasing salaries, firms in the UK won't.