Fourteen per cent of global banking organizations have clawed back compensation payments made to employees while a further three per cent have reclaimed the payments but have yet to receive the pay back, according to Mercer.
Clawbacks, where paid-out compensation is reclaimed based on financial restatement, gross negligence or other malfeasance, are a common feature in bank compensation structures today. Their inclusion has been encouraged by regulators in Europe and North America as a means of managing employee risk-taking following the financial crisis of 2008, according to Mercer’s Financial Services Executive Compensation Snapshot Survey, which looks at compensation structures in 63 global financial services companies.
“There are a variety of reasons why actual clawbacks of payments already made are limited — often the concept conflicts with local labour laws so actually recouping the funds can be difficult,” said Vicki Elliott, global financial services human capital leader at Mercer. “Clawbacks are relatively new phenomena in compensation programs so it will take some time for them to bed down. A small number of clawbacks doesn’t signify that the sector is ignoring lessons from the financial crisis but does raise legitimate questions about whether companies will actually seek payback of compensation paid.”
There have also been numerous cases where top executives have succumbed to political and public pressure and volunteered to forego bonus payments awarded to them by their boards as a sign of increased responsiveness in the sector, she said.
“The majority of banks have also introduced ‘malus conditions’ on deferred compensation,” said Elliott. “This can result in reduced, or no payouts, of deferred monies. It will be interesting to see if, at a time when the news is dominated by major banking missteps and scandals in the U.S. and the U.K., levels of clawback and malus increase in 2012.”
If they do not, it would be fair to ask if the regulatory approach of managing risk through this kind of pay feature is working, she said.
“Focusing on the manner in which banks are managing risk, performance measurement and compliance internally may achieve much more in terms of sound risk management than the regulatory requirements on pay structures have achieved thus far.”
Almost one-half (44 per cent) of banks have had clawback provisions in place prior to 2011 and an additional 18 per cent have introduced them subsequently, found the Mercer survey. Typically, a clawback is triggered by criteria on an individual level with the most prevalent criteria to trigger a clawback being a breach of code of conduct (73 per cent) and individual non-compliance, breach of authority level or ethical violations (63 per cent).
Eighty per cent of banking organizations have malus provisions in place, compared to 60 per cent of insurance organizations. The most prevalent criteria to trigger malus reductions are firm (67 per cent) and business unit (54 per cent) downturns or a loss in financial performance, and individual breach of code of conduct (56 per cent).
“It is crucial that malus arrangements are constructed properly so the balance between risk management and appropriate incentive is maintained,” said Dirk Vink, Mercer senior associate and snapshot survey project manager. “Malus conditions should be aligned with the continued measurement of business performance over a realistic timeframe for assessing likely realized outcomes.”
Most organizations have mandatory bonus deferrals (66 per cent) and forward-looking long-term incentive programs (70 per cent), found the survey. The majority still base their mandatory deferral payout on corporate performance rather than business unit or individual performance.
The two most prevalent performance metrics used to determine final deferral payouts are net/operating profit or loss (42 per cent) and relative or absolute total shareholder return (27 per cent).
“It is critical for a firm to maintain a forward-looking, long-term incentive program, particularly for top executives, in order to keep them consistently tied to the future success of the company. Deferred annual bonuses do not assure this link when annual performance is weak” said Elliott.
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