UNITED KINGDOM:Bonus Clawbacks Could Become a UK Corporate Governance Best Practice - 4 May 2009

Analysis: Bonus Clawbacks – It’s Payback Time

Bonus clawbacks could soon become a UK corporate governance best practice

Sir Fred Goodwin, former chief executive of Royal Bank of Scotland
and Britain’s most hated ex-banker, is still clinging to his
£700,000-a-year pension. But public outrage at the rewards given to
failed bosses could soon force boards to change the way executives are
paid. 

Support is growing among shareholders for measures to stop bonus
payments to directors who have driven their companies to the edge. Bonus clawback provisions are a way to do this.

Bonus clawbacks can be thought of as coming in two
types – hard and soft. The hard type enables boards to demand that a
bonus is actually repaid should a company fail in the future. The soft
type involves the deferred payment of all or part of a bonus. If the
company has continued to profit by a fixed date, then the bonus will be
paid in full. If it has made a loss, the bonus will be withheld.

The Association of British Insurers, whose members represent
one-fifth of the UK stock market, has recommended clawbacks for years.
Marc Jobling, assistant director of investment affairs, says: “We are
in favour of bonus clawback provisions. In this environment, there is
an opportunity to introduce them.”

The ABI says bonus clawbacks would end rewards for failure by
linking individual pay to the long-term consequences of their
decisions. In practice clawbacks would apply to board members and
senior managers whose actions could be directly traced to the profit
and loss of the company or business division.

In February, storage firm Safestore became the first UK company to
write bonus clawback provisions into executive contracts. These give
the remuneration committee power to ask directors to repay bonuses,
should the sums prove to have been “manifestly inaccurate” in light of
the company’s future financial performance.