Pay clawbacks starting to bite
Clawbacks, where employee compensation that has been paid out is reclaimed based on financial restatement, gross negligence or other malfeasance, are a common feature in bank compensation structures today. Their inclusion has been encouraged by regulators in Europe and the US as a means of managing employee risk-taking following the financial crisis of 2008.
New survey data issued by Mercer shows that 14 per cent of global banking organisations have "clawed back" compensation payments made to employees, while a further 3 per cent of organisations have reclaimed payments but have yet to receive them.
This recent data comes from Mercer's Financial Services Executive Compensation Snapshot Survey, which looks at compensation structures in 63 global financial services companies, including banks and insurance firms.
"There are a variety of reasons why actual clawbacks of payments already made are limited. Often, the concept conflicts with local labour laws, so actually recouping the funds can be difficult," says Vicki Elliott, global financial services human capital leader at Mercer.
"Clawbacks are relatively new phenomena in compensation programmes so it will take some time for them to bed down. A small number of clawbacks doesn't signify that the sector is ignoring lessons from the financial crisis, but does raise legitimate questions about whether companies will actually seek payback of compensation paid," she says.
Dr Hans Kothuis, Mercer's Asia-Pacific rewards leader, gives an Asian perspective.
"In spite of an increasingly global regulatory environment, significant differences remain between jurisdictions, with some countries beginning to adopt their own regulations," he says. "We continue to observe different approaches to remuneration between global, regional and local financial institutions operating in Asia. Therefore, many international institutions are finding it progressively more difficult to stay competitive in this environment."
In terms of deferrals, Kothuis observes that while international banks tend to apply deferrals to all employees, regional and local banks in Asia are more likely to limit deferrals to senior management, key personnel and senior control staff.
According to Mercer, the relatively low usage of clawback underlines the importance of clearly defining the "Malus" conditions which allow companies to revise payment amounts or not pay out at all if actual performance results differ from agreed ones.
"It is critical for a firm to maintain a forward-looking, long-term incentive programme, particularly for top executives, to keep them tied to the future success of the company. Deferred annual bonuses do not assure this link when annual performance is weak," Elliott says.