Does perception matter on pay and bonuses?

Bank of England governor said he wants to see more clawbacks to penalise unnecessary risk-takers

By Michelle Perry | Published 10:30, 19 February 14

Bank of England governor Mark Carney warned banks this week to not just defer bonus payments but to ensure those deferrals were for longer periods of time.

But it was his comments on clawbacks that caught my attention. Carney said banks should ensure a clawback clause in bankers’ contracts so that they can take back any bonuses paid if bankers are later found to have taken unnecessary risks.

The rise of the clawback is something I’ve been monitoring over the past few years after we saw far too many executives walk away with millions in bonus payments despite poor performance or as Carney put it “conduct issues, which unfortunately we have seen … far too much”.

The most up-to-date research by Deloitte shows us that the number of companies including some form of clawback rose to 80 percent last year, up from 61 percent in 2012. All but two of the top 30 companies have a clawback policy.

In 2011 just 36 percent of FTSE100 companies had a clawback clause in place compared to 21 percent in 2010.

The increased popularity of clawbacks is partly in reaction to shareholder activism, and partly in response to government moves to tackle excessive executive pay. The government already legislated in 2012 giving investors a triennial binding vote on executive pay and exit payments, which has now come into force.

But the government also asked the accounting watchdog the Financial Reporting Council to look at whether the governance code – the rules all public companies must comply with or explain their reasons why they haven’t – needs amending on matters of pay.

Specifically, the FRC consulted on three proposals: clawback arrangements, whether executive directors should sit on pay committees of other listed companies, and what actions companies might take if they fail to obtain at least a substantial majority in support of a pay resolution.

The FRC is currently analysing the responses to the consultation which closed in December.

In its research Deloitte found that most companies do not disclose details in the remuneration report of how clawback provisions work.

“Our understanding is that in the majority of companies the provisions allow deferred shares to be reduced or forfeited entirely. Relatively few companies, although there are some, appear to have provisions in place which would allow them to reclaim bonuses which have already been paid, or shares which have already vested (real ‘clawback’),” Deloitte said in its most recent ‘Directors Remuneration in FTSE 100 companies’ report.

A look at the responses to the FRC from some of the FTSE100 shows that for the most part management are in favour of including clawbacks in pay policies, but resistant to any changes in the code that would force companies to specify how monies could be recovered or withheld.

Astrazeneca Aviva, Capita, GlaxosmithKline, Tate & Lyle, BG Group, Marks & Spencer and Whitbread are some of the FTSE100 that have responded to the FRC.

The point that most struck me in reading the comments from some of the UK’s top companies was the uniformity in response. This could be double-edged. On the one hand, it could be seen as a decisive outcome or as united front to ward off any changes.

As an aside, many FTSE companies were also “strongly opposed” to reforms to restrict the appointment of executive directors to sit on the remuneration committee of other listed companies, despite shareholder dissent on this matter.

With the shareholder spring of 2012 – when investors took a stand on “exorbitant” payouts – still fresh in the minds of remuneration committees, executive pay was more restrained last year. But with the recovery taking hold, it’ll be interesting to see what 2014 holds. For now, however what interests me most is whether the FRC will amend the governance code in response to investors’ noisy criticisms of 2012.

Perception is often as important as reality.

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