How banks intend to avoid the FSA's restrictions on bonus buybacks
As we've said several times, the FSA is banning buybacks. From now on, it will not be possible to negotiate a generous bonus from an existing employer simply by threatening to leave.
Or will it?
The FSA's Remuneration Code says that:
"Retention awards may be granted in exceptional circumstances,
such as a corporate restructuring and where a strong case can be made for retention of particular key staff members on prudential grounds.
and that...
Proposals to give retention awards should form part of any notice of the restructuring proposals.
Alert to this, the head of recruitment at one bank says an idea is coalescing around the restructuring exemption. "Every department will simply have a restructuring plan," he says. "If that's what it takes to be allowed to retain our top people, that's what we'll do."
Will it work?
Probably not, say lawyers.
"The exemption will only work if it's a genuine major restructuring rather than something that's being done solely for the purpose of permitting buybacks," says Sam Whitaker, counsel in law firm Shearman & Sterling's executive compensation and employee benefits practice.
What constitutes a major restructuring?
The FSA gives some guidance in Section 15.3.8 of its Handbook, where it specifies examples such as: 'setting up a new undertaking within a firm's group,'
'commencing the provision of cross border services into a new territory;' 'commencing the provision of a new type of product or service (whether in the United Kingdom or overseas)'; or 'ceasing to undertake a regulated activity or ancillary activity, or significantly reducing the scope of such activities'.
As such, it may be possible to offer buybacks if a bank's in the process of making redundancies, says Whitaker.
Whilst this may appear to open the door to the resumption of widespread retention bonuses, Jon Terry, head of compensation and benefits at PricewaterhouseCoopers points out that buybacks can only be offered in 'exceptional circumstances'. And the head of financial services at a magic circle law firm in the City points out that the FSA's concept of 'retention bonuses' is based around the pre-emptive payment of retention awards when a restructuring plan is devised - rather than the reactive payments of retention bonuses when someone tries to leave.
Nice try, therefore, but not necessarily effective.
