Bern, Switzerland (GenevaLunch) - The Swiss banks regulatory body, Finma, has begun consulting with the banking industry and other concerned parties on a system that would limit salaries and bonuses in order to avoid excessive risk in the future. The consultation runs from now to 14 August and the system is expected to go into effect in January 2010, with banks required to comply by 2011. UBS, however, must comply with the principles in 2009, as part of the agreement under which it is receiving government funding.

Two of the key features are greater transparency and performance compensation based on longer periods, but Finma also emphasized in publishing news of the consulting process 3 June that banks’ boards will be expected to play a stronger role in overseeing pay. The proposed policy, referred to as the Circular, would apply to all financial institutions, not just large banks, which is what international financial market supervisory bodies are currently recommending.

The new system is designed to reduce risk but also to raise employees’ awareness of risk and profit, says Finma. It explains the rationale behind the Circular:

Finma views variable remuneration as the employees’ stake in the success of the company and requires that all variable remuneration paid out must actually have been earned by the company over the long term. By contrast, variable remuneration is not paid if a company does not perform well. Finma defines success based on economic profit. As a result, a company only creates added value if an excess remains after deducting the full risk-adjusted cost of capital. The more sustainable a company’s positive performance, the more employees can benefit from variable remuneration.

Company and stock market legislation today call only for disclosure of senior management pay, but under Finma’s new rules financial institutions will be required to report on all employee compensation.

Related: Finma press release and  TSR (Fre) with reactions from the political and banking worlds

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