The Financial Services Authority (FSA) has issued a code of practice on pay following the recent public outcry over bonuses paid to the staff of failing banks.
Stopping short of capping bonuses, the FSA has instead suggested firms should decide bonus payouts based on the long-term profits of a business rather than the revenue of a particular team.
It is hoped the code will encourage firms to operate remuneration policies that are consistent with sound risk management, and do not expose them to excessive risk.
FSA chief executive, Hector Sants, said: “We have already outlined the work we have been doing on remuneration during the last 12 months. The code of practice we have published today is the next stage in that work and clearly lays out the framework we expect firms to adopt.”
The financial regulator has also advised that bonuses take into account current and future risks to profits, the cost of capital and liquidity, and that firms do not calculate bonuses solely based upon performance in the current year.
The new code applies to all FSA-regulated firms. The FSA will consult on the code in March.
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