The Queen’s Speech has confirmed that the proposed Financial Services Bill would give the Financial Services Authority (FSA) new powers to void future pay and bonus contracts if it deems them too risky. While PricewaterhouseCoopers (PwC) continues to advocate the reform of executive remuneration, its reward experts call for clarity on how the various ongoing legislative and regulatory initiatives (including the Walker recommendations still to come) will work together. The potential for multi-tiered regulation across sectors and countries also has repercussions in terms of affected organisations’ ability to compete for talent.
Jon Terry, partner and head of reward, PwC, said: “Some of the changes needed to restore trust in remuneration processes and support the future resilience of financial services are already underway. Multi-layered rules with the same objectives are unhelpful so clarity on how the Bill would interplay with other initiatives, such as the G20 pay agreements and the Walker governance review, will be the critical next step. What is clear is that pay for performance must become a reality, which means an end to pay for effort and a clear articulation of what constitutes performance underpinned by robust governance. Banks are under real pressure to get their pay and bonus structures right – this is best achieved by tailoring their models to their individual business and risk strategies.
He added: “While the initial impact will be felt by banks, this sends a clear message – firms in other parts of financial services and beyond need to get their houses in order or risk losing the freedom to use responsibly governed pay as a force for motivating and rewarding their executives. Any focus on new powers, which are likely to relate to a very small number of individual contracts, must not distract from the need to ensure all organisations’ remuneration structures and processes are appropriately risk adjusted.”
Since the FSA’s remuneration code of practice was published in August, how some elements would be interpreted and enforced has been uncertain – particularly in terms of how to structure pay and what proportion of bonuses should be deferred. As such, that the UK government proposes new powers for the FSA is not unexpected.
Terry said: “Time will tell whether the new rules will bring about better alignment between remuneration and risk. The potential for unintended consequences needs to be pre-empted.”
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