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Bonus clawbacks - not just a banking question

18th March 2014 | The Bank of England announces strengthening of bonus claw backs A key feature of the pay debate since the global financial crisis has been bonuses purporting to be based on profits, when asset valuations were later shown to be unreliable, and large financial penalties for miss selling and misconduct arrive some years after the event.

We have also seen payment of bonuses despite large annual losses, a ‘heads they win, tails you lose’ approach to remuneration for performance.

 

The announcement that the Prudential Regulatory Authority will begin consultations that may see bonus deferrals for up to 10 years and claw back of bonuses up to six years after they were paid is to be welcomed.

 

PIRC has long lamented that soft and transient measures for high pay do not align with the interests of shareholders. The move by the BoE is a much needed step, but also recognises the failure of remuneration committees, and the coterie of remuneration consultants who have devised the intricate, but ultimately failed schemes, that remuneration committees and boards have subsequently endorsed. In one sense the schemes themselves represent a less than subtle example of ‘financial miss-selling’, assisted by convoluted accounting complexity, and in many cases downright erroneous accounts.

 

The PRA announcement proposes new rules come into force in January 2015. With the looming prospect of billions in legal costs and forex fines battering bank balance sheets over the following years the efficacy of the new provisions will face an early test.

 

Whilst the problems are clearly exposed in the banking sector, the question arises of how long flawed schemes can persist in other sectors before the approach of the authorities becomes equally desirable, for shareholders elsewhere. Investors will no doubt look to the FRC and BIS to catch up with the PRA here.

 

Institutional shareholders are increasingly asking why their interests always seem to lag behind vested interests. The cultural values of many in the financial sector, from the global crisis to the forex fiasco, make this a pertinent and yet unresolved question.

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