Bonus clawbacks under scrutiny

IFR 2299 7 September to 13 September 2019
5 min read
Americas, EMEA, Asia
Christopher Spink

Britain’s financial regulator is to take a closer look at financial institutions’ decisions to rescind bonuses due to misconduct or other reasons after being criticised for lacking teeth.

The Financial Conduct Authority said in a letter to remuneration committee chairs at the end of August, reviewing the latest bonus round and setting out how it plans to assess the next one, that firms have been adjusting awards to reflect poor performance and misconduct, but appeared to be falling short.

It said “some firms continue to find it challenging to provide appropriate justifications for how the level of adjustments have been determined”.

Compensation structures were changed in the European Union in 2014 as part of a string of post-crisis reforms. The changes included capping cash bonuses, making pay more transparent and requiring pay to be deferred for longer so it could be clawed back if a problem subsequently emerges. More pay tends to be in shares and vests over at least five years.

But Susan Kramer, a member of the UK’s Banking Standards commission, last week said she was disappointed about how the new regime was operating.

“The senior managers’ regime sounds strong and positive. It has been in place for three years, but it has not been used,” Kramer told the House of Lords.

“That is a real failure. The senior management regime is a long way from proving itself and now has a reputation for being tick-box.

“I talk to senior bankers who were very afraid when the regime was first brought in and who now feel very relieved that it will not check the way in which they do business. I join others in saying that we need to look again at whether the regulators are fit for purpose or should be given greater powers,” Kramer said.

DOCKING PAY

Withdrawing awarded bonuses rarely happens in practice.

Across Barclays’ 1,590 material risk takers, the firm withdrew £1m of deferred remuneration in 2018, which included £500,000 taken away from chief executive Jes Staley in May 2018, after the FCA said he had breached individual conduct rules when trying to find the identity of a whistleblower.

Deutsche Bank, which has also endured a string of misconduct problems in recent years, reduced its deferred variable pay by €7m in 2018 due to misconduct issues across its 1,913 material risk takers.

The FCA’s letter to remuneration chairs said that in the current financial year it will continue to focus on firms’ approach to how they adjust pay if problems arise.

“We expect you to oversee how your firm makes consistent judgments on the level of adjustments made and why any differences exist between incidents or the individuals concerned,” the letter said.

“Where the behaviour of any employee falls below the expected standards, you are also expected to have appropriate oversight to ensure that appropriate adjustments are made in a timely manner.”

CULTURAL ISSUES

The FCA also said it wanted to take a close look at how firms’ culture and governance was influencing bonus awards.

“We will review firms’ remuneration and recognition practices to ensure that approaches to rewarding and incentivising all staff reinforce healthy cultures and do not drive behaviours that would lead to harm to consumers or markets,” it wrote.

Reviewing last year’s awards it said some firms had embedded conduct in pay policies. Deutsche said a third of its long-term awards to its top executives depended on “corporate culture, client satisfaction and dealing with clients” alongside shareholder returns and organic capital growth.

Deutsche’s achievement level in 2018 was 81% specifically on culture and clients, but was dragged back to 41% overall, because organic capital declined in the period and shareholder returns were poor.

The FCA told remuneration chairs to consider how pay policies and practices “contribute to a healthy culture and drive the right behaviour”. It said: “The way an organisation incentivises its staff will drive its culture.”

But Kramer said not enough had changed despite the post-crisis reforms.

“What worries me most is the underlying problem of culture: the tone from the top, from the senior managers and regulators. This is where we have seen the least change.

“This industry must be taken by the scruff of the neck; that is the only language it really understands … I want to see a regulator with some real teeth.”