The Swiss Financial Market Supervisory Authority (Finma) last week issued a circular effective January 1 next year governing remuneration practices in the financial sector and said its aim is to have a lasting impact on how salaries for financial sector professionals are designed. However, Finma decided against levying an absolute or relative cap on bonus payments.
Finma has paid "particular attention" to bonus payments, terming it "the employees' stake in the success of the company" however has not imposed a ceiling on bonuses. Finma makes the point that variable compensation should be dependent on whether performance which has been delivered is sustainable and the risks associated with the profits. Further, Finma suggests banks should ensure their cost of capital is covered, including providing risk capital, and firms should take into account their capital and liquidity situation before paying out bonuses. Finma says in the circular it aims to "prevent high variable remuneration being granted merely as a result of entering into large risks and generating short-term, unsustainable earnings".
Finma also stipulates that senior employees and decision-makers should receive a significant portion of their bonus in deferred payments and linked to risk. "Making the value of deferred remuneration such as blocked shares dependent on the future performance of the institution and its risks will strengthen risk awareness and the incentive for sustainable business," said Finma. Finma also said it welcomes clawbacks, whereby bonus payments to employees can be rescinded if losses emerge in future years, or malus, whereby bonuses are held in escrow and not paid out if subsequent events show profits were unsustainable or due to large amounts of risk-taking. UBS announced new compensation practices in November last year, including the introduction of a malus scheme.
Only Switzerland's seven-largest banks and five-largest insurance providers are governed by the new rules, which are mandatory for firms required to have at least SFr2 billion ($1.99 billion) of capital. Adopting the new guidelines is discretionary for Switzerland's other financial institutions including banks, securities traders, insurance providers and other firms in the financial sector. However, Finma has the right to impose the guidelines on any firm that it feels has a high risk profile or "shortcomings and inappropriate remuneration practices".
Finma also said that while it expects the board of directors of the firm to share the company's remuneration policy and salary structures with shareholders, it will not insist that specific employees and their remuneration be disclosed.
Credit Suisse announced new rules governing compensation for senior employees at the end of October. The Swiss firm has increased the fixed component of salary for managing directors and directors, while linking variable compensation to return-on-equity.
