The Advisors' Blog

– Broc Romanek, CompensationStandards.com

On Monday, the United Kingdom’s Financial Services Authority issued informal guidelines to help its Staff gauge whether a company’s executive pay practices are aligned with sound risk management practices; more formal guidance is expected at some point (for analysis of the US Treasury’s new guidelines issued yesterday, see Mark Borges’ and Mike Melbinger’s blogs and this Washington Post article). Below is a related WSJ article:

As the U.K. government unveiled a far-reaching plan Monday to rescue failing banks, it signaled it would make limits on executive compensation a cornerstone of the effort. In doing so, it went further than the U.S., for now, in tackling an issue that has spurred a voter outcry on both sides of the Atlantic. Prime Minister Gordon Brown promised taxpayers that they wouldn’t lose out in the bank rescue, in which the government intends to take large stakes in two of the country’s biggest banks. “This crisis has proved beyond doubt the virtues of the sound business practice of rewarding responsible risk-taking and not irresponsibility,” Mr. Brown said Monday.

At the same time, the U.K.’s markets regulator issued guidelines aimed at clamping down on outsize compensation packages, saying that pay structures at investment banks might have encouraged risky practices. In a sternly worded letter to bank chiefs, Hector Sants, chief executive of the Financial Services Authority, said that banks’ boards had a responsibility to make sure they have effective structures in place to set pay policies. “It would appear that in many cases the remuneration structures of firms may have been inconsistent with sound risk management,” Mr. Sants said. “It is possible that they frequently gave incentives to staff to pursue risky policies, undermining the impact of systems designed to control risk.”

In Britain, where top executives have long earned less than their counterparts in the U.S., corporate compensation has become a potent political issue. Since 2003, U.K. shareholders have cast advisory votes on executive-compensation policies and how much they pay executives. The financial crisis has spurred calls for a crackdown on executive compensation in both the U.S. and the U.K. The rescue package that U.S. President George W. Bush signed into earlier this month contains a provision barring incentives for “unnecessary and excessive risks” at companies in which the U.S. government takes a “meaningful” stake. The law also contains certain limits on corporate-tax deductions for executive compensation and bars hefty exit packages for some executives. But the vague wording of the excessive-risk clause might make it difficult to enforce, some corporate-governance experts have said.

In the U.K., the pay crackdown produced quick initial results Monday. Both the Royal Bank of Scotland Group and HBOS said their departing chief executives wouldn’t receive severance packages, after the government unveiled plans to take large stakes in both banks.

While the U.K. regulator said it wasn’t seeking to get involved in setting pay levels, it signaled that it would be pressing the issue with financial firms. Mr. Sants said that the FSA held a number of high-level discussions with U.K.-based firms last month about remuneration policies, and that before the end of the year it would arrange a further round of visits to make certain that “bad practices” aren’t present and that good practices are being followed. He also stressed that action on compensation needs to be international in scope and said that the regulator would report on “global discussions” on compensation issues early next year.