SYSC 19.2 Remuneration Code: General requirement

If a firm's remuneration policy is not aligned with effective risk management it is likely that employees will have incentives to act in ways that might undermine effective risk management.

The aim of the Remuneration Code is to ensure that firms have risk-focused remuneration policies, which are consistent with and promote effective risk management and do not expose them to excessive risk. It expands upon the general organisational requirements in SYSC 4.

The Remuneration Code covers all aspects of remuneration that could have a bearing on effective risk management including wages, bonus, long-term incentive plans, options, hiring bonuses, severance packages and pension arrangements. In applying the Remuneration Code, a firm should have regard to applicable good practice on remuneration and corporate governance, such as guidelines on executive contracts and severance produced by the Association of British Insurers (ABI) and the National Association of Pension Funds (NAPF). In considering the risks arising from its remuneration policies, a firm will also need to take into account its statutory duties in relation to equal pay and non-discrimination.

As with other aspects of a firm's systems and controls, what a firm must do in order to comply with the Remuneration Code will vary according to the nature, scale and complexity of the firm and its activities. For example, while the Remuneration Code refers to a firm's remuneration committee and risk management function, it may be appropriate for the governing body of a small firm to act as the remuneration committee, and for the firm not to have a separate risk management function.

The principles in the Remuneration Code will be used by the FSA to assess the quality of a firm's remuneration policies and whether they encourage excessive risk-taking by a firm's employees.

The FSA may also ask remuneration committees to provide the FSA with evidence of how well the firm's remuneration policies meet the Remuneration Code's principles, together with plans for improvement where there is a shortfall. The FSA will also expect relevant firms to use the principles in assessing their exposure to risks arising from their remuneration policies as part of the internal capital adequacy assessment process (ICAAP).

The Remuneration Code is concerned with the risks created by the way remuneration arrangements are structured, not with the absolute amount of remuneration, which is a matter for firms' remuneration committees.