PARTNER AT NORTON ROSE LLP
The announcement last week that major investment banks will join the big five British banks in agreeing to adhere to the remuneration principles set out by the G20 meeting in Pittsburgh last month is a significant coup for the broker of the deal, Lord Myners, and the Treasury. The principles which aim to “align compensation with long-term value creation, not excessive risk-taking” state that compensation should be variable, with a substantial amount (up to 60 per cent) paid under deferral arrangements over a period of not less than 3 years. More than 50 per cent of variable compensation should be awarded in shares and the remaining cash portion should vest in the recipient gradually to allow unvested amounts to be clawed back if the performance of the business is not as anticipated.
Deferring compensation into performance-related share awards has long been an effective way of aligning a recipient’s interests with long-term shareholder value. What is being proposed is just a different way of achieving that effect. Companies will need to ensure that any existing share schemes are sufficiently flexible to operate with a deferred bonus arrangement and they must also be careful in situations where a bonus forms a significant proportion of a recipient’s remuneration and is described as “discretionary”; the bonus should be explicitly stated to be non-contractual to avoid the risk of a contractual right to it arising. The “clawback” provisions in relation to deferred amounts do not go as far as the FSA’s previous comments in relation to the clawback of bonuses already paid. This is perhaps due to the feasibility of doing so in light of, for example, the cost of court enforcement or the pursued executive’s assets. That said, companies should still be mindful of the practical effect of clawback, for example on a recipient’s freedom to move to another company when their bonus remains deferred.
The political controversy around the payment of bonuses by bailed-out institutions is clearly understood. We can only hope that the political solution adopted is also the correct systemic one.