GEO UK & Channel Islands Chapter Meeting Remuneration in the Financial Services Sector

1. GEO UK & Channel Islands Chapter Meeting Remuneration in the Financial Services Sector 16 February 2011

2. Agenda • GEO Update • Remuneration in the Financial Services Sector • Background • Panel Discussion • Sophie Black – Principal, Mercer • Nicholas Greenacre – Partner, White & Case LLP • Jeremy Mindell - Senior Reward and Tax Manager, Henderson Global Investors • David Shammai - Head of Executive Reward Policy, The Royal Bank of Scotland plc • Q&A • Drinks

3. GEO Update • Next UK & Channel Islands Chapter Meeting • 5:30pm, 9 March 2011 • Deloitte LLP, 2 New Street Square, EC4A 3BZ • Corporate action case studies • National Grid rights issue • Carphone Warehouse/TalkTalk demerger • Speakers from Equiniti, National Grid and Deloitte • Register at www.globalequity.org/geo/UKChannelIslands • 12th Annual Conference • 15-17 June 2011 • Okura Hotel Amsterdam • Register at www.globalequity.org/geo/2011 • Discounted rates until 31 March • Award submissions open until 24 March

4. “When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.” Chatham House Rule

5. “Excessive compensation in the financial sector has both reflected and encouraged excessive risk taking. Reforming compensation policies and practices is an essential part of our effort to increase financial stability.” G20 Communiqué, 25 September 2009

6. Introduction - background • Financial crisis • Plenty of incentives to do well … but no negative incentives to check poor performance • Little or no link between risk and reward • Poor governance • Banks or casinos? • Public distaste of “fat cats” in general • High remuneration • Large bonuses • “Guaranteed bonuses” to facilitate recruitment • Large termination payments (to “get rid” of people) • Generous pension entitlements

7. Introduction – the regulatory hierarchy

8. Merlin and the Code • FSA Remuneration Code • Objectives • Scope • Firms • Individuals • Governance • Remuneration Structure • Project Merlin

9. FSA Remuneration Code – December 2010 • Objectives • to sustain market confidence • and promote financial stability • through reducing the incentives for inappropriate risk-taking by firms • and thereby to protect consumers

10. FSA Remuneration Code – Scope (1) • Firms • 2,700 banks, building societies and CAD investment firms • 2,500 of which added on 1 January 2011 • includes overseas branches and consolidated group members of UK firms • includes UK branches and subsidiaries of non-EEA firms • excludes UK branches of EEA firms • Split into 4 tiers with different minimum expectations of compliance • all rules apply to tier 1 (with one exception for UK subsidiaries) • some disapplications to tiers 2, 3 and 4 • all tiers must submit annual data return • all tiers must submit Remuneration Policy Statement, but tier 1 detailed and tiers 2, 3 and 4 templates/questionnaires

11. FSA Remuneration Code – Scope (2) • Individuals (Code Staff) • Staff who have a material impact on the firm’s risk profile, including • senior management • risk takers • staff engaged in control functions • any employee receiving remuneration that takes them into the same remuneration bracket as senior management and risk takers • De minimis provisions exempt individuals from certain rules • variable remuneration <=33% of total remuneration AND • total remuneration <=£500,000

12. FSA Remuneration Code – Governance • Central and independent internal review of remuneration policy • Remuneration committee composed of non-executives • Maintenance of Code Staff record • Employees in control functions must • be independent from the business units they oversee • have appropriate authority • be remunerated adequately and in accordance with the achievements of their functional objectives, i.e. not business area performance

13. FSA Remuneration Code – Remuneration Structure (1) • Total remuneration based on individual, business unit and firm performance assessment • multi-year framework taking account of business cycle and risk • non-financial metrics significant part of assessment • effective risk management and regulatory compliance • poor performance on non-financial metrics overrides financial metrics • No guaranteed variable remuneration unless • exceptional, for hiring new Code Staff and for first year of service only • not more generous than offered/awarded by previous employer • and subject to appropriate performance adjustment • voidable on breach

14. FSA Remuneration Code – Remuneration Structure (2) • Balanced ratios between fixed and variable components • >=50% of variable remuneration (including deferred and non-deferred) to consist of appropriate balance of • shares or equivalent instruments, subject to retention • and capital instruments • Deferral for 3-5 years • normally >=40% of variable remuneration • but >=60% of variable remuneration where • variable remuneration particularly high (£500,000 definitely, but perhaps less) • or executive director of significant firm • voidable on breach

15. FSA Remuneration Code – Remuneration Structure (3) • Unvested variable remuneration to be reduced as a minimum on • reasonable evidence of employee misbehaviour or material error • material downturn in firm or business unit • material failure of risk management in firm or business unit • No hedging

16. UK - Merlin

17. Panel Discussion

18. Questions & Answers

19. Drinks • Turn left out of the doors • Room 10