SYSC 19G.6 Variable remuneration

1An example of where it may be justifiable to pay variable remuneration to a member of the management body of a MIFIDPRU investment firm that benefits from exceptional government intervention is where that person was not in office at the time the exceptional government intervention was first required.

1. (1)

   1For some firms it may be appropriate to give equal weight to financial and non-financial criteria for the purposes of SYSC 19G.6.5R. For other firms a slightly different split may be appropriate.

2. (2)

   Non-financial criteria under SYSC 19G.6.5R should:

   1. (a)

      form a significant part of the performance assessment process;

   2. (b)

      override financial criteria, where appropriate;

   3. (c)

      include metrics on conduct, which should make up a substantial portion of the non-financial criteria; and

   4. (d)

      include how far the individual adheres to effective risk management and complies with relevant regulatory requirements.

3. (3)

   Examples of non-financial criteria under SYSC 19G.6.5R include:

   1. (a)

      measures relating to building and maintaining positive customer relationships and outcomes, such as positive customer feedback;

   2. (b)

      performance in line with firm strategy or values, for example by displaying leadership, teamwork or creativity;

   3. (c)

      adherence to the firm’s risk management and compliance policies;

   4. (d)

      achieving targets relating to:

      1. (i)

         environmental, social and governance factors; and

      2. (ii)

         diversity and inclusion.

4. (4)

   A firm should ensure that when it assesses individual performance, the assessment process and any variable remuneration awarded in accordance with SYSC 19G.6.4R does not discriminate on the basis of the protected characteristics of an individual in accordance with the Equality Act 2010.

1. (1)

   1Guaranteed variable remuneration is sometimes referred to as a ‘sign-on bonus’ or ‘golden handshake’.

2. (2)

   Guaranteed variable remuneration can be used as a way to compensate new staff members where they have lost the opportunity to receive variable remuneration by leaving their previous employment during the performance period. These awards may be called ‘lost opportunity bonuses’.

3. (3)

   The FCA expects non-SNI MIFIDPRU investment firms to award guaranteed remuneration only rarely and not as common practice.

1. (1)

   1Retention awards are bonuses which are dependent on an individual remaining in a role until a defined event or for a set period of time. For example, retention bonuses can be used under restructurings, in wind-down or in the context of specific projects within a firm.

2. (2)

   The payment of a retention award may be made dependent on the material risk taker meeting certain performance criteria that have been defined in advance.

3. (3)

   The FCA expects non-SNI MIFIDPRU investment firms to make retention awards to material risk takers only rarely and not as common practice.

1Buy-out awards involve a firm compensating a new staff member, or ‘buying out’ their previous contract with another employer, where the deferred variable remuneration of the staff member was reduced, revoked or cancelled by the previous employer. This could be because they terminated their contract or because the individual has to pay back some money, for example where the employer has paid for a training course or qualification for the individual that was attached to a retention clause.

1. (1)

   1Where a MIFIDPRU investment firm is unable to issue eligible instruments, the firm may apply to the FCA for a modification under section 138A of the Act to permit the firm to use alternative arrangements. The firm will need to provide a detailed explanation in its application of the alternative arrangements it is proposing to operate.

2. (2)

   The FCA may grant a modification under section 138A of the Act for these purposes only where it is satisfied that:

   1. (a)

      compliance by the firm with the requirement to issue variable remuneration in eligible instruments would be unduly burdensome or would not achieve the purpose for which the rules were made; and

   2. (b)

      granting the modification would not adversely affect the advancement of any of the FCA’s objectives.

3. (3)

   As part of its assessment of whether the modification would adversely affect the advancement of its objectives, the FCA will consider whether the proposed alternative arrangements for variable remuneration achieve similar outcomes to the standard requirements applicable to eligible instruments. In particular, the FCA will normally consider the following non-exhaustive list of factors:

   1. (a)

      whether the proposed alternative arrangement ensures suitable alignment between the interests of the staff member and the long-term interests of the firm, its clients and creditors;

   2. (b)

      whether the proposed alternative arrangement is subject to a retention policy that is of sufficient length to align the incentives of the staff member with the long-term interests of the firm, its clients and creditors;

   3. (c)

      whether the proposed alternative arrangement is clear and transparent to the staff member and contains sufficient detail on the applicable conditions;

   4. (d)

      whether the firm will ensure that any amounts that are subject to deferral and retention arrangements cannot be accessed, transferred or redeemed by the staff member during the deferral and retention periods;

   5. (e)

      whether the proposed alternative arrangement would facilitate the appropriate application of malus and clawback requirements;

   6. (f)

      whether the proposed alternative arrangements adequately ensure that the value of the variable remuneration received does not increase during the deferral period through distributions or other payments on the instrument; and

   7. (g)

      where the proposed alternative arrangements allow for predetermined changes of the value received as variable remuneration during deferral and retention periods, based on the performance of the firm or the managed assets, whether the following conditions would be met:

      1. (i)

         the change of the value is based on predefined performance indicators that are based on the credit quality of the firm or the performance of the managed assets;

      2. (ii)

         where deferral and retention must be applied, value changes are calculated at least annually and at the end of the retention period;

      3. (iii)

         the rate of possible positive and negative value changes is equally based on the level of positive or negative credit quality changes or performance measured;

      4. (iv)

         where the value change under (i) is based on the performance of assets managed, the percentage of value change should be limited to the percentage of value change of the managed assets;

      5. (v)

         where the value change under (i) is based on the credit quality of the firm, the percentage of value change should be limited to the percentage of the annual total gross revenue in relation to the firm’s total own funds.

4. (4)

   If a firm cannot issue eligible instruments because of its legal structure, that is likely to be a reason for the FCA to conclude that requiring the firm to comply with SYSC 19G.6.19R would not achieve the purpose for which that rule was made.

1. (1)

   1In considering what is an appropriate retention policy for the purposes of SYSC 19G.6.22R, a firm should consider at least the following:

   1. (a)

      the length of the deferral period referred to in SYSC 19G.6.24R(1);

   2. (b)

      the length of the firm’s business cycle;

   3. (c)

      the types of risks relevant to the role of the staff member; and

   4. (d)

      how long it could take for the risks underlying the staff member’s performance to crystallise.

2. (2)

   The greater the impact of the material risk taker on the risk profile of the firm and of the assets managed, the longer the retention period should be. Different retention periods for different material risk takers may be appropriate, particularly where the applicable deferral periods differ.

1. (1)

   1Where appropriate, a firm should tailor the proportion of deferred variable remuneration, the deferral period and the speed of vesting in different ways for different categories of material risk taker.

2. (2)

   The FCA considers that it may be appropriate for the most senior material risk takers at a firm (for example members of the management body), to be subject to a deferral period longer than the 3-year minimum.

3. (3)

   It may be appropriate for firms to apply different proportions of deferred variable remuneration, deferral periods or vesting arrangements to the portion of variable remuneration paid out in cash and the portion paid out in instruments.

4. (4)

   In the FCA’s view, the higher the amount of the variable remuneration, and the higher the ratio of variable to fixed remuneration, the more appropriate it is likely to be to defer a greater proportion of the variable remuneration.

5. (5)

   In certain circumstances variable remuneration below £500,000 may still be considered ‘particularly high’ and so subject to 60% deferral. A firm should take into account the average remuneration at the firm, the ratio of the variable to fixed remuneration of the material risk taker, and the amount of variable remuneration compared to that of other staff at the firm.

6. (6)

   After the first deferred portion of the variable remuneration vests in accordance with SYSC 19G.6.24R(4), the FCA does not expect vesting to take place more often than once a year.

1The FCA considers it good practice for the deferred portion to contain a higher proportion of instruments than the non-deferred portion.

1. (1)

   1The effect of SYSC 19G.6.31R(1) is that (save in the circumstances explained in (2)) a non-SNI MIFIDPRU investment firm must include in its remuneration policy the possibility of applying in-year adjustments, malus and clawback to the variable remuneration of its material risk takers. Where performance adjustment is required, the appropriate tool or tools (in-year adjustments, malus or clawback) should then be applied.

2. (2)

   A non-SNI MIFIDPRU investment firm that is not required by SYSC 19G.6.24R to apply deferral will not be able to apply malus, so should foresee the use of in-year adjustments and clawback arrangements only. Alternatively, the firm may choose to use deferral, which would enable the use of malus arrangements in addition to in-year adjustments and clawback.

3. (3)

   A non-SNI MIFIDPRU investment firm should ensure that the malus and clawback periods it sets and applies allow sufficient time for any potential risks to crystallise. This may mean that different periods are set for different categories of material risk takers.

4. (4)

   In setting appropriate malus and clawback periods, a non-SNI MIFIDPRU investment firm should take into account all relevant factors, including:

   1. (a)

      the nature of the material risk taker’s activities;

   2. (b)

      the material risk taker’s impact on the risk profile of the firm or of the assets it manages; and

   3. (c)

      the length of the business cycle that is relevant for the material risk taker’s role.

5. (5)

   For a non-SNI MIFIDPRU investment firm that satisfies the conditions in SYSC 19G.1.1R(2)(a) or (b), the FCA considers that 3 years will generally be an appropriate starting point for the firm’s consideration of the appropriate clawback period.

6. (6)

   The FCA’s ‘General guidance on the application of ex-post risk adjustment to variable remuneration’ provides further detail of the FCA’s expectations on firms’ use of malus and clawback arrangements.

1. (1)

   1In the FCA’s view, malus should be applied when, as a minimum:

   1. (a)

      there is reasonable evidence of staff member misbehaviour or material error;

   2. (b)

      the firm or the relevant business unit suffers a material downturn in its financial performance; or

   3. (c)

      the firm or the relevant business unit suffers a material failure of risk management.

2. (2)

   In the FCA’s view, clawback should, in particular, be applied in cases of fraud or other conduct with intent or severe negligence which led to significant losses.

1Actions a firm may take under SYSC 19G.6.36R include requesting an undertaking or declaration from its material risk takers and implementing policies regarding dealing in financial instruments.