Prudential Regulation Authority Rulebook

3A.1

When establishing and implementing the remuneration policy referred to in 2A.1(12), a firm must comply with all of the following principles:

1. (1) the remuneration policy and remuneration practices must be established, implemented and maintained in line with the firm's business and risk-management strategy, its risk profile, objectives, risk-management practices and the long-term interests and performance of the firm as a whole and must incorporate measures aimed at avoiding conflicts of interest;
2. (2) the remuneration policy must promote sound and effective risk-management and must not encourage risk-taking that exceeds the risk tolerance limits of the firm;
3. (3) the remuneration policy must apply to the firm as a whole, and contain specific arrangements that take into account the tasks and performance of the governing body, persons who effectively run the firm or have other key functions and other categories of employees whose professional activities have a material impact on the firm's risk profile;
4. (4) the firm must ensure that it establishes general principles for the remuneration of those categories of employees whose professional activities have a material impact on the firm's risk profile and that it oversees implementation of those general principles;
5. (5) there must be clear, transparent and effective governance with regard to remuneration, including the oversight of the remuneration policy;
6. (6) an independent remuneration committee must be created, if appropriate in relation to the significance of the firm in terms of size and internal organisation, in order to periodically support the governing body in overseeing the design of the remuneration policy and remuneration practices, their implementation and operation; and
7. (7) the remuneration policy must be disclosed to each of the firm's employees.

3A.2

A firm must ensure that the specific arrangements referred to in 3A.1(3) comply with all of the following principles:

1. (1) where remuneration schemes include both fixed and variable components, such components must be balanced so that the fixed or guaranteed component represents a sufficiently high proportion of the total remuneration to avoid employees being overly dependent on the variable components and to allow the firm to operate a fully flexible bonus policy, including the possibility of paying no variable component;
2. (2) where variable remuneration is performance-related, the total amount of the variable remuneration is based on a combination of the assessment of the performance of the individual and of the business unit concerned and of the overall result of the firm or the group to which the firm belongs;
3. (3) the payment of a substantial portion of the variable remuneration component, irrespective of the form in which it is to be paid, must:
   1. (a) contain a flexible, deferred component that takes account of the nature and time horizon of the firm’s business; and
   2. (b) that deferral period must not be less than three years and the period must be correctly aligned with the nature of the business, its risks, and the activities of the employees in question;
4. (4) financial and also non-financial criteria must be taken into account when assessing an individual’s performance;
5. (5) the measurement of performance, as a basis for variable remuneration, must include a downwards adjustment for exposure to current and future risks, taking into account the firm’s risk profile and the cost of capital;
6. (6) termination payments must be related to performance achieved over the whole period of activity and be designed in a way that does not reward failure;
7. (7) persons subject to the remuneration policy must commit to not using any personal hedging strategies or remuneration and liability-related insurance which would undermine the risk alignment effects embedded in their remuneration arrangement; and
8. (8) the variable part of remuneration of the employees engaged in the internal control, risk-management, compliance, internal audit, and actuarial functions and those business units referred to in 11A to 11F must be independent from the performance of the operational units and areas that are submitted to their control.

3A.3

A firm must ensure that the remuneration policy is designed in such a way as to take into account the internal organisation of the firm, and the nature, scale and complexity of the risks inherent in its business.