New survey data from Mercer shows that 14% of global banking organizations have clawed back compensation payments made to employees while a further 3% of organizations have reclaimed the payments but have yet to receive the pay back.
Mercers Financial Services Executive Compensation Snapshot Survey looks at compensation schemes in 63 global financial services companies, including banks and insurance firms.
Clawbacks, where paid-out compensation 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 North America as a means of managing employee risk-taking following the financial crisis of 2008.
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, said Vicki Elliott, Global Financial Services Human Capital Leader at Mercer. Clawbacks are relatively new phenomena in compensation programs so it will take some time for them to bed down. A small number of clawbacks doesnt signify that the sector is ignoring lessons from the financial crisis but does raise legitimate questions about whether companies will actually seek pay-back of compensation paid.
In Mercers report, 44% of banks have had clawback provisions in place prior to 2011- they were more common in North America prior to 2011 than in EMEA – and an additional 18% of banks on both sides of the Atlantic have introduced them subsequently. Typically, a clawback is triggered by criteria on an individual level with the most prevalent criteria to trigger a clawback being a breach of code of conduct (73%), and individual non-compliance, breach of authority level or ethical violations (63%).
According to Mercer, the relatively low usage of clawback underlines the importance of clearly defining the Malus conditions applied to deferrals. Malus conditions allow companies to revise the payment amount or not pay out at all if actual realized performance results over a multi-year timeframe turn out to be significantly less than the performance assessment when the original award was determined. Mercers report indicates that 80% of banking organizations have Malus provisions in place, compared to 60% of insurance organizations. The most prevalent criteria to trigger Malus reductions are Firm (67%) and Business Unit (54%) downturns/loss in financial performance, and individual breach of Code of Conduct (56%).
Most organizations have mandatory bonus deferrals (66%) and forward-looking long-term incentive programs (70%). Mandatory deferrals are most prevalent in the banking industry (83% of banks) and a majority (58%) also have forward-looking long-term incentive programs. Almost all insurance organizations (94%) have forward-looking long-term incentive programs, but only one-third have mandatory deferrals.
(JDC)