Salaries and bonuses must not be set according to a market average, the FSA says today, despite citing industry levels as justification for a reported £10m worth of pay rises for its staff.
The regulator says it recognises the need for firms to offer competitive remuneration packages but says an industry comparison "should be a secondary rather than a primary factor" in their determination.
But in its Business Plan for 2009/10, the FSA said the salaries it offers "must be comparable with the external market" and earmarked £10m to give pay rises to staff whose salaries are now "out of line".
The guidance forms part of a draft code of practice on remuneration policies issued today, which the FSA will consult on.
FSA spokesperson Heidi Ashley says: "We are not a commercial company so some parts of the code will not apply to us. Where we feel it is applicable, we will follow it."
The aim of the draft code, the regulator says, is to ensure firms have remuneration policies "which are consistent with sound risk management", and which do not expose them to excessive risk. It adds it is not concerned with setting salary or bonus levels.
"We have already outlined the work we have been doing on remuneration during the last 12 months," FSA chief executive, Hector Sants, says.
"The code of practice we have published today is the next stage in that work and clearly lays out the framework we expect firms to adopt."
According to the FSA, if a firm's remuneration policies are not aligned with sound risk management "it is likely those policies will provide incentives for employees to act in ways that might undermine it".
It says it may ask firms to prepare annual statements on remuneration policy which should also be made available to shareholders ahead of the annual vote on directors' remuneration.
On bonuses, it adds the fixed component of remuneration should be a "sufficiently high proportion of total remuneration" to allow the company to operate a fully flexible bonus policy.
Finally, firms should not assess performance solely on the results of the current financial year, it says.
The FSA will consult on the code and further proposals for remuneration policy in March.IFAonline
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