Editor's Take: Why two year guarantees will not be paid back

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A letter sent last week from Hector Sants to bank chief executives doesn't look good for the recipients of this year's most generous guaranteed bonuses, many of which extend to more than one year.

The letter has been seized upon by both the Guardian and the Financial Times to imply that all two year pay deals struck after March 18th this year will be revoked because they're incompatible with the FSA's March consultation paper on financial services compensation.

Needless to say, this won't happen.

The major moves of recent times (Sanaz Zaimi, Antonio Polverino), wouldn't have happened without two year guarantees (why else go from Goldman to BofA Merrill or Merrill to RBS?). Now that they've happened, there's no undoing them and banks are contractually obliged to pay.

Moreover, compensation consultants point out that the FSA isn't banning two year pay deals per se - it's merely saying that they 'may be inconsistent with effective risk management.'

Jon Terry, head of the reward and compensation practice at PricewaterhouseCoopers, says that if other risky practices have been mitigated, two year guaranteed bonuses may be acceptable.

Terry also points long guarantees may be more palatable to the FSA if linked to performance targets (a practice which has certainly become more common), and that banks may simply decide that penalties imposed by the FSA for two year packages are worth paying in order to secure senior revenue generating staff.

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