The rise of the clawback

Will the potentially useful clawback be foiled before it has been allowed to work?

By Michelle Perry | Published 15:45, 22 February 12

ClawBackThis week Lloyds Banking Group became one of the first leading UK companies to apply the increasingly popular tool – and a central part of government plans to tackle excessive pay – the clawback.

Lloyds’ announced that outgoing CFO Tim Tookey, who is set to join insurance company Friends Life this month, and Helen Weir, who has taken over as finance director at John Lewis – are among the 13 current and former executives to have their 2010 bonuses clawed back.

Clawback provisions are on the rise. A significant 36 percent of FTSE100 companies (including 50 percent of the top 30 companies) had a clawback clause in place in 2011 compared to 21 percent in 2010, according to a Deloitte study. The number of companies including a clawback provision among the FTSE250 has jumped from 6 percent in 2010 to 25 percent last year, the Deloitte report found.

Given government plans to introduce legislation to tackle executive pay including forcing companies to include a clawback, it will be interesting to see how many more companies include clawback provisions before the government makes it law or in a bid to head off ministers before they get a chance to legislate.

Despite the rise in clawbacks, their application has been rare, which leaves me to reason that Lloyds’s decision to apply the provision is the board’s attempt to head off yet more political sabre-rattling that a part-nationalised bank is rewarding executives for poor performance.

Lloyds’ decision to claw back bonuses, which were due to be paid this month, is in response to the mis-selling of payment protection insurance, which cost the bank up to £3.2 billion in compensation. The bank has however stated that its decision was based on “accountability and in no way on culpability or wrong-doing by the individuals concerned”.

In this case Lloyds clawed back part of executives’ bonuses in deferred shares so the bank had to reduce the number of deferred shares offered. In 2009 the Financial Services Authority introduced new regulation stipulating that part of any bonuses offered by financial institutions should be made up of deferred shares as an option to claw back monies if and when the occasion arose.

But this week I discovered that companies are clawing back cash bonuses already paid to executives leaving them to foot the tax bill because boards are pursuing the gross not net amount.

Clawback provisions are typically used only in circumstances of misstatement of results or gross misconduct of an individual, Stephen Cahill, remuneration expert at Deloitte, said in the report.

Therefore the argument for businesses in this situation is, I suspect, that if they are ‘penalising’ individuals for whatever reason, the board must retrieve the full amount despite the employee having already paid the tax bill — which could arguably run into hundreds of thousands of pounds in some cases — leaving the executive not just out of pocket for the bonus, but further short changed for the tax bill.

Companies can skirt this potentially complicated situation by following the FSA’s rules and ensuring all bonuses are partly made up of deferred shares. Otherwise the existence of the clawback provision, which is a useful tool, may run into bigger problems in the future.

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