The FSA’s much awaited consultation on the revised compensation code is out.

It’s huge (112 pages) and dense (around 400 clauses), but there are a few things you need to know. They are:

1) A lot of people are going to be paid 500k and less in future

The FSA wants to defer at least 40% of bonuses for many employees (see below for elaboration on this) and 60% of bonuses for anyone earning more than 500k.

However…section 3.79 of the rules says that if you earn less than 500k and less than 33% of your total comp is paid as bonus you won’t be subject to deferral rules, rules on paying bonuses in shares, and rules on guaranteed bonuses.

This means you will be able to get all your bonus immediately. And you will be able to get a two year guarantee.

Would you really want to increase your pay to (say) 650k given all the additional strings attached? The effect of clause 3.79 is likely to be similar to that of stamp duty on the housing market: a lot of people will be paid 500k or less; anyone earning more than that will have to earn a lot more to make the additional restrictions worthwhile.

Thinking of moving from a major US bank to a minor M&A boutique? If that M&A boutique buys out your existing stock, you won’t be certain of receiving the full payout any more. In future, buyouts must be linked to performance in a new position. Needless to say, the boutique could set easy performance requirements, but the FSA reserves the right to veto them – which may discourage this.

3) There is no mention of the EU’s rule that only 30% (and 20% for high earners) of bonuses can be paid in cash

One of the most notable things about the EU’s compensation regulationswas the provision that cash payouts would be capped at 30% of bonuses and 20% of bonuses for particularly large bonuses.

The FSA’s consultation paper makes NO MENTION OF THIS.

Nick Dent, an employment partner at City law firm Barlow Lyde and Gilbert, says it’s all down to differing interpretations of the ‘Capital Requirements Directive.’

“The European Parliament’s interpretation of the directive is that out of (say) a €100k bonus, 40% needs to be deferred and that of the 60% up front payment, 50% needs to be paid in shares, leaving only 30% payable in cash,” says Dent. “But the FSA reckon that it is simply 50% of the overall bonus award that must be delivered in shares.”

However, the FSA does say that this is provisional. Ie. They might include the EU rules in future.

Previously, the FSA’s compensation rules only applied to the 27 biggest banks, now they want to apply them to 2,500 firms.

5) The new rules will apply only to ‘Code Staff’

The definition of ‘Code Staff’ is provided in the table below (section 3.14 of the FSA’s document).

Source: FSA

The FSA dropped this notion last year, and switched to a recommendation. However, section 3.68 suggests stricter criteria may be making a comeback: ‘We therefore propose including a new rule to ensure firms have an appropriate balance between the fixed and variable elements of total remuneration, to reinforce the existing guidance.’

For the moment, table 1) in Annex 3) (see below) makes it amply clear that bonuses continue to make up the bulk of compensation.

Source: FSA

7) You will not be able to hedge your bonus

All bonus hedging will be outlawed.

8) Non-compliance will be punished

The Financial Services Act (passed in April) means that banks which don’t comply with the FSA requirements could have contracts voided, money recovered, or property seized.

Section 2.6 says, ‘UK branches of firms whose home state is within the EEA are not required to apply the Code.’ This means various European banks in the City. The downside is that similar requirements are likely to be applied in their home countries, and they’ll be held to those instead.

10) This year’s bonuses will be affected

The proposed new rules will come into force on January 1st 2011 and apply to ’2010 performance.’