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February 27, 2009 10:35 AM Age: 8 yrs
Accountability and the New SheriffCategory: CG Commentary & Opinion, CFR News, CFR-I News, Eleanor Bloxham, CFR Commentary, CFR-I Commentary
Source: Eleanor Bloxham
In reference to the article yesterday (Accountability and Investor Involvement in Pay: February 25, 2009 - http://www.accountability-central.com/single-view-default/article/accountability-and-investor-involvement-in-pay/?tx_ttnews%5BbackPid%5D=17&cHash=27695e988f), boards and investors can look to the future now because there is a new sheriff in town that is going to make their jobs a whole lot easier.
Mirroring some of the concerns addressed in my letter to the SEC in 2006 and some of the other work I have done to implement risk within compensation pay programs, today [February 26], the Financial Services Authority (FSA) of the UK issued a “Code of practice” on remuneration policies (i.e. compensation policies) which you can read here: http://www.fsa.gov.uk/Pages/Library/Other_publications/Miscellaneous/2009/cop_remun.shtml
While it applies to UK firms, it also is expected to apply to foreign firms with UK subsidiaries. And while it is expressly to be applied to financial services firms, the principles could be used in any firm. This is the beginnings of concrete action by regulators, which, no doubt, will be copied by others.
This code states that it will be used to “assess the quality of a firms' remuneration policies and linkage, if any, between such policies and excessive risk-taking by staff” and may be used to ask the compensation/remuneration committee to provide “evidence of how well the policies measure against the principles, together with plans for improvement” – as well as -- “use the principles in assessing their exposure to risks arising from their remuneration policies”. (The exact two points in yesterday’s article -- see Accountability and Investor Involvement in Pay: February 25, 2009 -- and the letter I wrote to the SEC in 2006 http://www.sec.gov/rules/proposed/s70306/ebloxham041006.pdf. )
Some of the key tenets of the code include:
One - Compensation committee members should include those with skills in risk management disciplines.
Two – The compensation committee should receive reports from those in risk management positions including information concerning risks associated with compensation policies.
Three – Firms may be asked to “prepare an annual statement on its remuneration policies” including how those policies impact the firm, individual behaviors and the firm’s risk profile.
“In drawing up this assessment, boards and remuneration committees should exercise their own judgement and not rely solely on the judgement or opinions of others. The FSA may seek a meeting with the Chair of the Remuneration Committee (or a firm's equivalent body) to discuss the annual statement.”
Four – Similar to compensation programs I’ve implemented, “the bonus pool calculation should include an adjustment for current and future risk, and take into account the cost of capital employed and liquidity required”. “The measurement of performance for long term incentive plans, including those based on the performance of shares, should also be risk-adjusted.”
Five – Also similar to compensation programs I’ve implemented, vesting periods and other mechanisms should be used to ensure alignment with long term results.
The future of compensation is here and there’s a new sheriff that is laying down the law.
Copyright 2009. The Value Alliance Company. All rights reserved.
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