Employees may receive additional rewards, bonuses, gifts, and cash from employers and clients for certain performance achievements. These additional compensation arrangements must not affect employees’ professional integrity, objectivity, and independence.
Let us discuss additional compensation arrangements and how the CFA institute guides dealing under such scenarios.
Additional Compensation Arrangements Standard – Definition
The Chartered Financial Analyst (CFA) Institute issues compliance standards regarding employee compulsory and additional compensation arrangements.
Its standard IV(B) states guidelines on the additional compensation arrangements as:
“Members and Candidates must not accept gifts, benefits, compensation, or consideration that competes with or might reasonably be expected to create a conflict of interest with their employer’s interest unless they obtain written consent from all parties involved.”
The standard specifically addresses additional compensation arrangements for the future endeavors of an employee. Gifts and compensation received for past performances are covered under the same standard’s I(B) guidelines.
First, an employee must analyze the current employment contract to assess whether it allows for additional work.
Then, the employee must seek prior approval under the Standard IV(B) guidelines for future work assignments internally or with an external entity.
Standard I(B) is to ensure the employee maintains objectivity and independence for the work undertaken additionally.
It simply means the employee’s professional integrity must not be compromised by accepting additional compensation.
For instance, if an employee receives additional compensation in the form of gifts for achieving certain results for a client (e.g meeting a deadline), it should be reported in written form.
The written report must be verified by the third-party paying additional compensation and the terms under which it is offered.
Similarly, the information must include the nature of the additional work, the length of the contract, and incentive goals to receive additional compensation.
Additional Compensation Arrangements Standard – Explanation
An employee can accept additional work and receive compensation against it on top of the compulsory benefits including salary, bonuses, shares, etc.
Standard IV(B) requires an employee to get written consent from the employer before signing an agreement that offers additional compensation packages.
The purpose of the written consent is to avoid any possible conflict of interest and a situation that may affect an employee’s objectivity.
For instance, a CFO working for one company may be involved as a consultant for another company primarily a competitor to the first company, which will create a conflict-of-interest situation for both employers.
Before that, an employee must comply with the employment contract terms. An employee can only agree to work and receive additional compensation if the agreement permits.
If the existing employment contract prohibits an employee from working for another entity, the employee cannot receive additional compensation from an external entity. However, additional internal benefits can still be received by the employee.
Standard IV(B) applies to additional compensation arrangements received by an employee internally and externally.
If an employer grants rights to employees to receive additional compensation for additional work, employees do not need written consent from the employer.
However, if the provision to take on additional work is conditional, the employee must seek approval before receiving additional benefits.
Additional internal compensation is often provided occasionally. An employee may perform overtime work or take on a project outside the contract’s original scope.
All such cases require an employee to get written approval before receiving additional rewards. Standard IV(B) applies to additional work in the future only.
If an employee received a bonus or additional reward for performance-based goals, it does not fall under the Standard IV(B) guidelines.
Similarly, performance-based stock compensation, gifts, and allowances do not fall under this standard.
An important note here is that Standard IV(B) includes both the monetary and non-monetary compensation arrangements employees receive.
If an employee’s work contract allows taking additional work, the employee can receive additional compensation from external parties as well.
For instance, if a Financial Analyst working with one entity under a full-time job contract assigns a short-term stint with another company.
The financial analyst must first obtain a no-objection certificate from the employer if the employment contract states so.
Otherwise, the employee only needs to provide written information to the employer before receiving additional compensation.
As mentioned above, Standard IV(B) applies to any monetary compensation (salary, wages, allowances, lump-sum cash amount) and non-monetary compensation (gifts, stocks, warrants, entertainment, tours).
Even when the employment does not differentiate between receiving additional monetary and non-monetary compensation, the employee must comply with the standard’s guidelines and inform the employer.
Standard I(B) v Standard IV(B)
The CFA institute’s standard I(B) states:
“Members and Candidates must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise their own or another’s independence and objectivity.”
It guides members to maintain objectivity and independence regarding compulsory compensation, rewards, and additional compensation.
It differs from Standard IV(B) in the sense that when an employee is expected to receive compensation from an external entity, the employee must analyze the situation to avoid possible conflict of interest for both parties.
A company may allow its employees to receive additional compensation for certain services. However, the employer must be informed under Standard I(B) whenever an employee receives such rewards.
In short, both standards guide avoiding any conflicts of interest, maintaining objectivity, and seeking prior approval before accepting additional compensation internally and externally.
Additional Compensation Arrangements Standard – Examples
Let’s consider a few example scenarios to understand the additional compensation arrangement guidelines.
Mr. Arthur works as a financial advisor in a company ABC. A client offers a special reward package for Mr. Arthur if he achieves a rate of return beating the average S&P500 for the last 10 years.
Whether or not Mr. Arthur successfully achieves the target rate of return, he must inform ABC company about the offer in the written form verified by his client.
Further, approval from ABC is mandatory to avoid any conflict of interest and maintain objectivity so that Mr. Arthur’s professional integrity remains intact.
Mrs. Staffney is a financial advisor who has been working for ABC company for many years. She also sits on the BOD of another company XYZ. Both companies record the regular arrangements for both companies.
XYZ company offers additional stocks to Mrs. Staffney to provide additional insights on specific investments. She does not disclose this to ABC company (the employer).
In this scenario, Mrs. Staffney has violated Standard IV(B) guidelines as she must inform ABC company about the offer to avoid a conflict of interest and to maintain professional integrity.