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SYSC 19G.4 Fixed and variable components of remuneration

Categorising fixed and variable remuneration

SYSC 19G.4.1R

1A MIFIDPRU investment firm must ensure that the remuneration policy makes a clear distinction between criteria for setting fixed and variable remuneration.

SYSC 19G.4.2G
  1. (1)

    1The effect of SYSC 19G.4.1R is that all remuneration paid to a staff member must be clearly categorised as either fixed or variable remuneration.

  2. (2)

    In allocating individual remuneration components to fixed or variable remuneration, it is the quality and purpose of the component that is decisive, not the label applied to it.

  3. (3)

    The FCA considers that:

    1. (a)

      fixed remuneration:

      1. (i)

        should primarily reflect a staff member’s professional experience and organisational responsibility as set out in the staff member’s job description and terms of employment; and

      2. (ii)

        should be permanent, pre-determined, non-discretionary, non-revocable and not dependent on performance; and

    2. (b)

      variable remuneration:

      1. (i)

        should be based on performance or, in exceptional cases, other conditions;

      2. (ii)

        where based on performance, should reflect the long-term performance of the staff member as well as performance in excess of the staff member’s job description and terms of employment;2

      3. (iii)

        includes discretionary pension benefits; and2

      4. (iv)

        includes carried interest, as referred to in SYSC 19G.1.27R.2

SYSC 19G.4.3G

1Returns made by staff on co-investment arrangements are shares in the profits as a pro rata return on an investment. The FCA does not usually consider these returns to be remuneration for the purposes of the MIFIDPRU Remuneration Code. However, the FCA considers these returns will be remuneration if the investment was made using a loan provided by the firm or by an undertaking in the same group as the firm, and if the loan was either not provided on commercial terms or had not been repaid in full by the date on which the returns on investment were paid.

SYSC 19G.4.4G
  1. (1)

    1In relation to remuneration received by a partner or a member in a limited liability partnership, the FCA’s view on how to categorise certain payments received by those individuals is as follows:

    1. (a)

      at the end of each year, the residual profits of a partnership or limited liability partnership are distributed among the partners or members. The level of ownership of each partner or member is reflected in the number of ownership shares they have. Residual profits are distributed according to the ownership shares, so are not linked to work or performance. In the FCA’s view, payments on this basis are not remuneration;

    2. (b)

      a partner or member may receive an amount fixed at the beginning of the year and subject only to the firm making a profit. These are often called fixed profit shares. A partner or member usually takes drawings on it throughout the year, often monthly. If profits at year-end are insufficient, drawings may have to be paid back. The FCA considers that drawings on fixed profit shares are usually fixed remuneration;

    3. (c)

      a partner or member may receive a discretionary share of the profit at the end of the year. These may be distributed to all partners or members but are usually dependent on the performance of the individual or their business unit. Awards may be at the discretion of the remuneration committee. The FCA considers that payments made on this basis are usually variable remuneration.

  2. (2)

    A firm that is a partnership or limited liability partnership may use a benchmarking approach instead of, or in addition to, the approach in (1) to categorise payments made to partners or members of limited liability partnerships. For example, it may take into account:

    1. (a)

      the remuneration structures of other individuals performing similar tasks or working in similar businesses as the partner or member in question; or

    2. (b)

      the return expected in a similar investment context where the partner or member has invested in a fund or firm.

  3. (3)

    Where a partner or member of a limited liability partnership works full-time for a firm the FCA would expect a reasonable portion of the partner’s or member’s profit share to be categorised as remuneration. Where a partner or member works part-time and receives less remuneration than a partner or member who works full-time, the FCA would expect a smaller proportion of the part-time partner or member’s profit share to be classed as remuneration.

Balance of fixed and variable components of total remuneration

SYSC 19G.4.5R

1A MIFIDPRU investment firm must ensure that:

  1. (1)

    the fixed and variable components of the total remuneration are appropriately balanced; and

  2. (2)

    the fixed component represents a sufficiently high proportion of the total remuneration to enable the operation of a fully flexible policy on variable remuneration, including the possibility of paying no variable remuneration component.

SYSC 19G.4.6R

1For the purposes of SYSC 19G.4.5R, a non-SNI MIFIDPRU investment firm must set an appropriate ratio between the variable component and the fixed component of the total remuneration in their remuneration policies.

SYSC 19G.4.7G
  1. (1)

    1When determining what is an appropriate balance and an appropriate ratio for the purposes of SYSC 19G.4.5R and SYSC 19G.4.6R respectively, a firm should consider all relevant factors, including:

    1. (a)

      the firm’s business activities and associated prudential and conduct risks; and

    2. (b)

      the role of the individual in the firm and, in the case of material risk takers, the impact that different categories of staff have on the risk profile of the non-SNI MIFIDPRU investment firm or of the assets it manages.

  2. (2)

    It may be appropriate for some staff to receive only fixed remuneration. The FCA does not consider it would be an appropriate balance for any individual to receive only variable remuneration.

SYSC 19G.4.8G

1A non-SNI MIFIDPRU investment firm may set different ratios for different categories of staff. For example, the FCA considers that it will usually be appropriate to set a lower ratio of variable to fixed remuneration for control functions than for the business units they control.

SYSC 19G.4.9G

1Ratios may differ from one performance period to the next.

SYSC 19G.4.10G

1When setting a ratio, a firm should consider all potential scenarios, including that a firm exceeds its financial objectives. The ratio should reflect the highest amount of variable remuneration that can be awarded in the most positive scenario. A firm should be satisfied that it has considered all relevant factors and should be able to explain its decision to the FCA if requested.

SYSC 19G.4.11R

1When a firm is assessing whether the award of variable remuneration is consistent with the ratio set in accordance with SYSC 19G.4.6R, it may exclude from that calculation any amount of severance pay that:

  1. (1)

    exceeds the maximum amount of severance pay that can be paid under the firm’s remuneration policy (in accordance with SYSC 19G.6.12R(2)); and

  2. (2)

    the firm has become obliged to pay as a result of a legal obligation that has arisen after the date on which the firm adopted the relevant version of its remuneration policy.

SYSC 19G.4.12G

1As explained in SYSC 19.6.12R(2), where severance pay is payable a firm’s remuneration policy must set out the maximum level of severance pay or the criteria for determining the amount. Firms should therefore take these policies into account when establishing the ratio between variable and fixed remuneration in accordance with SYSC 19G.4.6R. The FCA accepts that in rare circumstances, for reasons that wouldn’t have been clear to a firm when setting its remuneration policy, a firm may become legally obliged to pay a higher amount of severance pay, for example as a result of legal proceedings. In these situations, SYSC 19G.4.11 states that the difference between the maximum severance pay permitted under the firm’s remuneration policy and the higher amount the firm is legally obliged to pay may be excluded from an assessment of whether an award of variable remuneration is consistent with the ratio set in accordance with SYSC 19G.4.6R.