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Clawback rules for executive rewards ‘impractical’

Employment lawyers believe plans to recover shares and bonuses ignore management and legal realities

Regulations now seem to develop faster than viruses. No business or profession is immune. The view seems to be that all regulation is good because no-one can be trusted to do the right thing. But over-zealous regulation does no good at all.

Proposed rules

The latest example is the Bank of England’s proposal to claw back bonuses awarded to senior executives of banks, building societies, insurers and major investment firms. The idea is that after an award of shares is made, or a bonus has been paid, employers should be able to grab it back if:

The suggestion is that this could happen for up to six years after the executive has received the performance award.

Flawed

There are serious flaws in these proposals, some of which have been pointed out by the Employment Lawyers Association (ELA) in its reply to the bank’s consultation paper. The bank suggests that clawback could happen irrespective of any failing by the person concerned and years after he or she had left the business. The ELA thinks it would be far better if the right to claw back bonuses or shares was limited to situations of personal wrongdoing by executives.

No one wants to defend those guilty of sufficient misconduct or incapability to deserve the clawback sanction, but if it was obvious that the reason the reward had to be repaid had no connection with the individuals concerned, and may hit them a long time after they have left the business, it is easy to see how cynically the incentive would be received in the first place. Any reward scheme has to be respected by employees if it is to have its intended effect.

The proposals also do not take into account that clawback is illegal in several European jurisdictions. Considerable complications could be caused if the individuals concerned had left the business and were resident in one of those jurisdictions or, as is entirely possible, were based there.

Contract changes

The proposals say that existing contracts of employment should be amended to enable businesses to apply clawback. This seems to assume that it would be possible to introduce such an amendment in to all employment contracts currently in place. Those who have had to make changes to existing contracts will know this is not always as straightforward as the bank appears to think it is. There is also an assumption that the rules that need changing are actually in employment contracts, but that is also probably not the case - the appropriate rules will often be in separate documents attached to the awards/bonuses. The ELA suggests that if these arrangements go ahead, they should be limited to future share awards only, and exclude those currently in place - that would make putting the right rules in place simple.

Waiting time

It is standard for there to be a period of time between a performance reward being earned and the reward (shares, for example) being available - three years is very common. The proposals suggest that these waiting periods should be extended and that the six year period for clawback should be added to them. This could amount to a total of 10 or 11 years’ uncertainty being attached to bonus payments or share allocations. Many will feel this is an excessive period and, again, could undermine the intention of the reward programme. It would make more sense to limit the process to one shorter period.

These criticisms are not made to defend excess in reward systems or to oppose the policy of only encouraging risk-taking that is appropriate. The proposals are, however, representative of much that is wrong with today’s regulatory regimes which seem to ignore many legal and management realities.

Stephen Levinson is a solicitor at Keystone Law and co-chair of the committee of the Employment Lawyers Association that considered these proposals.

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This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.

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