The ‘Declaration on Strengthening the Financial System’ issued by the G20 leaders on 2 April 2009 endorsed the principles on pay and compensation in significant financial institutions developed by the FSF to ensure compensation structures are consistent with firms’ long-term goals and prudent risk taking.

The FSF principles require:

• Firms’ boards of directors to play an active role in the design, operation and evaluation of compensation schemes;
• Compensation arrangements, including bonuses, to properly reflect risk and the timing and composition of payments to be sensitive to the time horizon of risks.
• Payments should not be finalised over short periods where risks are realised over long periods; and
• Firms to publicly disclose clear, comprehensive and timely information about compensation. Stakeholders, including shareholders, should be adequately informed on a timely basis on compensation policies to exercise effective monitoring.

The prudential supervisory authority in each country will assess firms’ compensation policies as part of their overall assessment of the firms’ soundness.

Australia’s APRA was represented on the FSF working party that developed the principles.

The FSF guidelines are among the best explained in the series we have seen so far, and rank with the IIF principles (see HERE) in being accompanied by a commentary that acknowledges that the proposed solutions are not perfect, that bank remuneration has a fair way to evolve, and that flexibility needs to be accommodated.

The FSF principles can be found HERE.

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