Much attention is focused on the remuneration for executive directors in large UK listed companies. It receives huge media, Government and investor interest even though it concerns less than 1,000 people directly – but one theme is of wider application as it is beginning to affect UK bonus arrangements generally.
This is “malus and clawback”. Although there are now many investor and corporate governance bodies which recommend malus and clawback, the Investment Association has issued the most recent guidance in the form of its updated Investment Association principles of remuneration.
Ten years ago, I doubt anyone had used the term “malus” meaning the opposite of bonus (i.e., the employee giving money back to the company). Since then it has grown in usage among remuneration professionals to refer to where a bonus technically has met the terms for payment (e.g., sales targets have been met) but the broader financial framework for the company or other considerations mean that bonuses should not be paid. Quoted companies go one stage further though at least for their directors, and also insist not just on future bonuses being forfeited in these cases but also on “clawback” or re-payment of bonuses already paid, going back at least several years.
These provisions have come in following the financial crisis and various corporate failures, where directors are perceived to have walked away with many years of bonuses and suffered much less pain than the investors who have made a massive loss on their investments. The circumstances in which these clauses can be used to reduce or claw back bonuses include:
- Individual or collective misconduct, or reputational damage.
- Subsequently discovered miscalculation errors.
- The financial figures on which the figures were paid have proved to be illusory for whatever reason.
- Sales figures not reflecting underlying performance.
- Simply where the company’s performance as a whole has been extremely poor.
Mainly this is a drafting matter as these issues are relatively rare occurrences, but all bonus arrangements should be checked for whether they contain this flexibility just in case. While these arrangements are mainly targeted at executive directors, these are filtering down into remuneration programmes for less senior executives and companies should have a debate about how far down into an organisation they should be extended as well as the circumstances in which they should operate.
What does this mean in practice?
We are now starting to see court cases in this area emphasising the need for effective drafting in the organisation’s plan rules, employee documentation and communications and clarity in the practices around them, such as:
- The organisation setting out the terms of malus and clawback clearly in all communications as well as formal documentation.
- Employees agreeing explicitly to these malus and clawback arrangements by signing a form of acceptance at the time of the award.
- The organisation’s discretion on the triggers of malus or clawback being exercised reasonably.
A recent case in this area has reassuringly shown that, properly operated, these clauses can work (Rajesh Parmar vs HSBC Private Bank (UK Ltd),  EWHC 2468), although an earlier case this year equally showed how not to use these provisions (John Daniels & George Tate vs Lloyds Bank plc and Lloyds Banking Group plc,  EWHC 660)!
So, although headlines are likely only if a quoted company director receives a bonus and the company suffers real financial distress shortly thereafter, which is hopefully relatively rare, having the tool available just in case can be relevant to any senior manager. While employees are instinctively uncomfortable with these arrangements, they do reflect modern corporate governance concerns that are increasingly hard to walk away from, whatever the company and whatever the level of manager.