Bonus Rage and Clawbacks

michaelscutt — Wed, 05 Aug 2009 11:00:40 +0000

Unusually for an August the topic of bonuses is back in the news pages. This isn’t surprising given that the recession has been firmly blamed on reckless bankers supposedly taking unnecessary risks to generate huge returns that almost led the banking system to collapse last autumn. Both Barclays and HSBC have announced huge profits for the last six months. In Barclays case it was £3bn up 8% on the equivalent period last year, and the comparable figure for HSBC was £2.8bn. Both banks also revealed that they were making massive provision for bad debts. Bob Diamond, the head of Barclays Capital (BarCap) was on the front page of The Independent on Tuesday, where it was reported that he had received a remuneration package in excess of $50mn at the height of the boom. The Independent also reported that the “average net income generated per member of staff” at BarCap had increased from £134,000 to £193,000 per member of staff in the last six months. The FT also reports today that a US hedge fund group called Och-Ziff, based in the US made a loss of $88.3mn because of a 74% increase in bonuses paid to its top traders. At the Dale Langley & Co website we recently posted on the steps the FSA are taking to try and restrict remuneration packages – click here to visit. The government, the FSA and the public are all determined to stick the boot in.

Much of the anger generated over this issue has been stoked by the fact that the taxpayer bailed out the banking system to prevent its collapse. In the case of Barclays and HSBC, of course, they did not directly receive state funds but are judged to have been indirect beneficiaries of the taxpayers’ largesse. If this wasn’t August we would, presumably be seeing the usual collection of hippies, anarchists and eco-warriors calling for bankers to be strung up from the nearest lamp-post (where are they - visiting their holiday squats in Tuscany?) The central issue is how do you balance the need for restraint with incentivising employees to produce the goods? Some much needed perspective on the whole issue was provided by Sean O’Grady writing in today’s Independent (click here). He calls for “sensible, intelligent rules” to govern remuneration packages and deplores the hypocrisy that sees people calling for bankers to hand back their bonuses: “if you or I were offered a £25mn bonus, we wouldn’t hand it back. Nor would we say no to the taxpayer paying for a second home, as our MPs did”. Good performance should be rewarded appropriately.

This of course is the nub of the matter as far as employees (and employment lawyers) are concerned. Over the years I have seen many people who are unhappy with the annual bonus they have been awarded and I’ve written before on the difficult legal issues that arise when it comes to challenging a bonus (click here). In recent months with all the redundancies occurring, perhaps not surprisingly, it has become less and less common for employers to make any sort of payment in respect of bonus. When negotiating a contract of employment it is always worth trying to include provision for payment, or pro-rata payment, of the bonus that would have been received had the employee remained in employment at the payment date.

Repayment and clawback provisions in new contracts of employment are also becoming increasingly common, especially amongst those banks that have received state funds. They will usually require that if performance (whether individual or corporate) does not match up to expectations then bonuses paid (including guaranteed bonuses) can be clawed back. The period of time covered by the clawback can be quite lengthy, perhaps two – three years, meaning that the recipient employee can be left in some uncertainty about how secure the guarantee is. This is an issue that needs to be dealt with at the stage of negotiating the terms of the contract upon joining the business: it can sometimes be renegotiated to the benefit of the employee. Just recently I have been instructed on a number of contract negotiations by employees who have secured offers of employment – evidence of “green shoots” perhaps? - and some of the sting of the clawback was removed.

Bonus Rage and Clawbacks originally appeared on Jobsworth by Michael Scutt on 05/08/2009.

Bonus – what bonus?

michaelscutt — Tue, 10 Feb 2009 11:14:30 +0000

I normally expect to get a lot of enquiries about low or non-payment of bonuses around this time of year. However, it is not normal for the subject of bankers’ bonuses to be front page news or for all three party leaders to jump on the bandwagon and criticise the level of bonus payments. Of course, we’re not living in normal times at the moment and bankers are going to be fair game for the media and politicians.

What is noticeable about the current debate is the lack of clarity. Are we talking about all bonuses (such as the fairly small sum that a cashier on a frontdesk in Barclays would expect to receive – cf: John Varley CEO of Barclays on BBC News last night) or the stonking seven or eight figure sums going to the Masters of the Universe? What about the high five or low six figure sums going to those in between? Also, are we talking about discretionary or guaranteed bonuses? Or commisssion payments? As usual the media seems to let us down.

Here is my take on the situation. If you’re working for an Investment Bank and sitting at your PC wondering if you’ll get a bonus (or smarting over having been told you won’t), these are the issues.

1. If the bonus you were expecting was wholly discretionary and you’ve got a low or nil bonus it is going to be difficult (but not necessarily impossible) to successfully challenge the award made to you. The precise terms of the bonus scheme will need to be looked at. Do you have to be in work at the date it is paid (have you been made redundant conveniently early so that you’re not around when the payment is made)? Is there a payment in lieu of notice clause in your contract?

2. Is it a commission payment? In other words, have you a contractual entitlement to be paid, say 10% of the value of the work you bill? If the employer doesn’t pay this they will need to have a pretty good reason because, provided you have met the conditions, you should be entitled. In reality this sort of scheme isn’t seen very often in the City and is not the target of the jibes made by all and sundry in the media.

3. Have you got a guaranteed bonus? These are seen most commonly when an employee joins a Bank, perhaps to compensate them for losing stock entitlements at their last job. Usually the schemes will require the employee to be in employment as at the payment date and not to be under notice or in the midst of disciplinary proceedings. The sums guaranteed can be substantial and it is these types of payment that will be giving the banks the biggest headaches. The employee will be entitled to receive the payment and I foresee much litigation occurring if payment isn’t made, especially if the employee has performed well. In cases where someone expecting a guaranteed bonus hasn’t performed well, or has lost their employer large sums of money, they may well find themselves facing a counter-claim for breach of contract for not performing.

My firm has a lot of experience in acting for banking executives in relation to all these issues. If you are in doubt about your situation do take legal advice quickly. You can reach me on 0207 464 8433 or at michaelscutt@dalelangley.co.uk

Bonus – what bonus? originally appeared on Jobsworth by Michael Scutt on 10/02/2009.