If you’re planning to find yourself a new job this year, you may find things slightly changed.
Thanks largely to the FSA’s
revised remuneration code, the monetary benefits of seeking a new role aren’t going to be what they were.
1) It will be VERY difficult to get a guaranteed bonus from now on
Headhunters think there will still be guarantees in 2011: “The standard one year guarantee is still very much in the market,” asserts one.
Compensation specialists beg to disagree.
“Guaranteed bonuses are going to be a big issue this year,” says Jon Terry, head of the compensation and benefits practice at PricewaterhouseCoopers. “The FSA’s rules on guaranteed bonuses now apply to everyone – not just
code staff [senior managers and risk takers].”
The FSA has banned multi-year guaranteed bonuses and said single year guarantees are permissible only in exceptional cases.
“Hiring banks will have to come up with a strong business rationale for a guarantee and they’ll be wondering whether it’s really worth it,” says Terry.
However, it may be possible to negotiate your way around this rule if you are a) earning less than 500k total comp and b) receive less than one third of this as a bonus.
2) If you DO get a guaranteed bonus, it cannot be worth more or vest more quickly than your last bonus at your previous employer
If you’re thinking of changing jobs in 2011 in order to get a guarantee of a higher and more liquid bonus than you received for 2010, think again.
As we pointed out previously, the FSA’s new compensation code also states that any guaranteed bonus granted to a new employee, cannot be greater, ‘either its amount or terms (including any deferral or retention periods) than the variable remuneration awarded or offered by a previous employer.’
In other words, if you manage to get a guarantee, it will at best be exactly the same as you were paid the previous year – and with the same deferral terms.
“The idea is that hiring investment banks can give someone a guarantee simply to replicate what they were paid as variable remuneration by the previous employer – but they can’t offer an additional sum simply as an incentive to move,” says Sam Whitaker, counsel in law firm Shearman & Sterling’s executive compensation and employee benefits practice.
Again, this may not apply if you are a) earning less than 500k total comp and b) receive less than one third of this as a bonus. (see below).
3) You won’t get a bonus buyback
Equally, if you’re thinking of threatening to leave just so that your existing employer panics and offers you a large guaranteed bonus for 2011, forget it.
The FSA has also banned bonus buybacks, except when a division is undergoing restructuring (in which case the FSA has to be told in advance that restructuring is taking place and buybacks may be necessary – they can’t be purely reactionary).
4) You might want to consider negotiating a temporary increase in salary
In the absence of bonus guarantees and buybacks, it may still be possible to negotiate a temporary increase in salary as a necessary incentive to change jobs or remain loyal.
However, Whitaker says there are questions over the viability of this tactic: “If a salary were increased only for a year or so, the FSA might question it. Effectively, it might be seen as a bonus dressed up as a form of fixed salary, and this might be scrutinised under anti-avoidance provisions.”
The FSA is likely to be more lenient if salaries are increased for several years before being lowered again, says Whitaker – although it’s not clear whether this would be permissible either.
5) It may be possible to negotiate more favourable deferral terms for the retained cash element of large bonuses
The FSA says that only 20% of bonuses worth more than 500k can be paid immediately in cash. Another 20% must be ‘retained’ as cash by the bank for an unspecified period of time. The remaining 60% must be deferred as shares or similar instruments for at least three years.
However, Chris Page, associate partner heading up the remuneration team at KPMG, says the FSA has indicated that the longer the deferral period for stock, the shorter the retention period for cash can be.
“Whilst requiring deferral periods to be not less than three to five years, the FSA have indicated that the longer the deferral period, the shorter the retention period for the non-deferred portion of the bonus can be,” he says. The only caveat is that the retention period for cash will still need to be at least six months.
If you have liquidity issues and need cash soon, but are prepared to wait longer for stock to vest in the next few years, this may be worth bearing in mind.
6) In some circumstances, it will be worthwhile earning less than 500k
If your total compensation is less than 500k, and your salary is more than a third of that (ie. more than 165k), the FSA is prepared to relax its rules on deferrals and guaranteed bonuses. This means it should be possible to get the full 500k guaranteed and although a portion is still likely to be deferred, that portion is likely to be lower than it otherwise would.
Therefore, it may not be worthwhile pushing for a total package of 550k, for example.