CISI integrity position paper
The purpose of this paper is to contribute to the important discussion of remuneration policies in financial services firms. The CISI’s Code of Conduct is the basis for the points and core principles which follow. The policy is addressed to those managers who are responsible for, or who contribute to remuneration policies.
The CISI believes that the financial industry is, and continues to be, a force for good. The UK industry is a world leader, which provides over 10% of the country’s GDP and employs over a million people. It has contributed very significantly to the wealth and prosperity of the nation.
Because of the global nature of the industry, there is significant international competition for talent. As a result, remuneration in some areas of financial services has been significantly higher than in other industries. To attract and retain top talent, firms need to pay and reward high performance, which is generally done via a variable bonus scheme, and many firms like this, as it has the advantage of minimising core fixed salary costs. It is because the industry has been so successful that some people in it are very well paid and it is this group which is the subject of much public comment and blame for the credit crisis and the consequent “bail-out”. We think that it was one factor and needs addressing, but it should be seen as only one of the many facets of the international crisis.
The public’s concern over reward level can be understood given the enormous requirement for taxpayers’ funds to rescue the banking sector which does not sit comfortably with the existing mechanisms for rewarding people who are regarded as having added significant value to their firm. For the tax year ending April 2007, less than 2% of UK taxpayers had total incomes in excess of £100,000 1. whilst the average compensation paid to the employees at one investment bank, was reportedly in excess of £150,000 2. and was considerably higher at another 3. Many executives at high street UK banks also received compensation in excess of £1m.
Although to the public “banker” is the generic term used to cover a multitude of activities within the industry, there are substantial differences in remuneration levels within the different sectors. Nevertheless, the principles contained within this code may be applied universally.
Policy and bonuses
The CISI is concerned that ethical standards in some financial sectors have been affected by inappropriate remuneration structures and is therefore setting out formally its policy on bonuses. It is aimed at all those who work in the sector, but particularly at the top of the institutions. It seeks to build on proposals often found in existing long term investment plans, and has many parallels in some of the good and bad practices on executive remuneration described in the FSA’s “Dear CEO” letter of 13 October 2008.
1. HMRC, Table 3.4 Income distribution, 2006/7
The CISI policy is applicable in a global context. It does not seek to discourage high performance and innovation, but to emphasize to those who set their company’s policy that they should always think and plan for the longer term, including a full appreciation of the risks involved.
This policy is intended to be applied to those who receive a bonus which exceeds the level of twice the average earnings for the country in which they are based and whose bonus is more than 50% of their contractual salary, regardless of their position within the firm.
These core principles are subject to practical interpretation within each firm and assume that any necessary management information to support the evaluation of an individual is readily available.
Follow the link to download the Bonus Policy Core Principles
2. BBC News, Robert Peston, 22nd Sept 08
3. BBC Website, Business, 13 Dec 06