Updated with news of Merill Lynch fine.NEW YORK ( TheStreet) -- UBS ( UBS) on Tuesday became the first investment bank to announce a major "clawback" of bonuses after a rogue trading scandal at the Swiss bank last year led to deep losses. The announcement closely followed recent disclosures by Goldman Sachs ( GS) and Morgan Stanley ( MS) that clarified that they had the right to recover previously awarded bonuses from any employee under certain triggers, such as a financial restatement due to bad trades or ethical misconduct. And on Wednesday, Merrill Lynch agreed to pay $1 million to regulators to settle accusations that it
In a survey conducted by Institute of International Finance and Oliver Wyman and published in October 2011, global banks cited "legal and practical" challenges in the implementation of clawbacks. Performance-linked deferrals were "cumbersome to introduce", the survey found, and the implementation was cited as among the biggest challenges in compensation reform. Even in the U.K, where there is considerable political backlash in bonus awards, it has been easier to strip executives of their knighthood, as was the case with former RBS chief executive Fred Goodwin, rather than clawback bonuses. Still, the introduction of such provisions has been fairly widespread, even beyond Wall Street, with Dodd Frank regulations requiring the SEC to adopt rules that prohibit companies from listing on the national security exchanges if they fail to implement a clawback policy on incentive-based compensation. According to Equilar, an executive compensation data firm, 84% of the Fortune 100 companies publicly disclosed clawback policies in 2011, up from a mere 17.6% in 2006. Most clawbacks are triggered by ethical or financial misconduct, according to the firm, though some companies do include other triggers that are not always very well defined. At UBS, the board can rescind between 10% and 50% of shares awarded to employees who get a bonus of 2 million swiss francs or more, if the division posts an operating loss. At Morgan Stanley, clawback provisions cover situations where there is 1) a substantial loss on a trading position or other holding or 2) any loss on a trading position or other holding where the employee operated outside the risk parameters applicable to such position or holding. In either case the position or holding should have been a factor in determining compensation. Goldman Sachs's compensation policy with regard to equity awards allows for forfeiture of bonuses in the event of a financial restatement or other "significant harm" to the firm's business or individual misconduct that results in legal or reputational harm. Merill Lynch had designed its compensation for brokers as loans that were set up to come due if they left the firm. When brokers who left did not pay, it filed over a 100 cases in the New York State Court to recover the money. But Johnson says that while firms will likely engage in a "tug of war" with regulators over clawbacks, they will not invoke it except in the rarest of circumstances. "Wall Street will be more aggressive in letting people go, in paying underperformers less. But clawbacks remains a very blunt tool" says Johnson, who argues that there are several challenges to implementing the policy. "You can't do it on a regular basis, you will have total chaos. You will be in litigation all the time. It will never work." Aaron Boyd, head of research at Equilar says recent pay trends such as deferring a greater portion of pay, deferring more pay into equity and using long-term vesting options, awarding"at-risk" performance units, all spell progress towards better compensation practices. "Wall Street has tried to do a better job of tying bonuses to long-term performance," says Boyd. But banks face a "tricky situation" in moving ahead with clawbacks. "There is the public perspective that executive pay is one-way and is seen as "too much money". But from the firm's perspective they need to compete for talent," says Boyd. "At the end of the day, if you are not performing well, they may not take back your previous compensation, but you could still lose your job, bonuses would come down and opportunities to get large sums of money are in jeopardy," he added. Still, proponents for clawbacks will likely push for more clarity and standardization of rules over time. "Clawbacks represent one of those rare mechanisms which represent a convergence of populist concerns and better incenting high performance outcomes," Michael Schrage, a MIT Sloan research fellow, wrote in a recent Harvard Business Review article. "The public want assurances that executive compensation is not determined by crony capitalists; investors seek greater confidence that incentive schemes don't lead to expensively perverse outcomes; and play-by-the rules employees who invest more effort in creating value than gaming the bonus pool appreciate efforts that don't reward colleagues and bosses who are too clever by half." -- Written by Shanthi Bharatwaj in New York.
Readers Also Like: