Salz Review - Wall Street Journal

141
Salz Review
An Independent Review of Barclays’ Business Practices
11.45 If paying bonuses in shares is a first step to better aligning employee and shareholder
interests, then the use of deferral is a way to improve risk sharing. Barclays has
followed the industry in its increasing use of bonus deferral. Bonuses over £65,000 in
financial year 2012 are subject to a graduated level of deferral and will be paid out
over the following three years subject to continued service and malus. 224 100% of
bonuses paid to managing directors in the investment bank have been deferred.
Increased deferral enables Barclays to claw back bonuses more easily as risks
crystallise. But deferring bonuses for longer periods leads to many recipients
discounting their value to reflect the possibility they will not be paid. As a result, they
are likely to have less impact on encouraging particular behaviours. 225 Ideally the
deferral period should reflect the degree of risk in the relevant business activity, with
greater and longer deferrals where there is a significant risk that the accounting basis
for the award could be shown to be inaccurate. The effectiveness of deferral as a
means of adjusting pay retrospectively will be greater where the consequences of
individual performance can be tracked over time and malus can be applied to the
awards before they vest.
11.46 There has been significant industry commentary about bonuses being subject to claw
back or malus. These terms are often confused and misused. In general use, clawback
requires an employee to pay back an amount already received under a cash or share
incentive scheme. This is difficult to apply both legally and practically. Malus, in
contrast, is used to reduce the employee’s unvested deferred cash or share incentive
award. In either case (subject to the terms of the arrangements), the cause can be:
because a risk crystallises as a result of which performance was inaccurately measured
at award, because the employee is in breach of his employment contract, or because
historic issues come to light. Although strictly different, malus and clawback are ways
of seeking redress either through recovery of what has already been paid or by
reducing the value of what is being held as a deferral. For this reason, we will use
them interchangeably – as, so we were told, Barclays does. 226
11.47 In the FSA’s Remuneration Code, Principle 12(h) 227 requires the largest financial
institutions to reduce deferred remuneration where there is evidence of employee
misbehaviour or material error; where the firm or business unit suffers a material
financial downturn; or where there is material failure in risk management.
11.48 Banks’ ‘accounts’ are complex and necessarily reflect a financial position at a given
point of time, with judgments made as to the valuation of assets and the prudent
provisioning at that point. Inevitably, these valuations and provisions will prove to be
wrong to some degree. Results also include items that will seem to have little to do
with employee performance, such as ‘own credit.’ In determining the size and
structure of the variable compensation pool, good practice requires a bank to
consider current and potential risks, the cost and quantity of capital required to
224 Code staff deferral is a minimum of 40% for bonuses less than £500,000 and 60% for bonuses of more
than £500,000.
225 See for example: PricewaterhouseCoopers, “If executive pay is broken, making it more complex is not the
answer”, The Psychology of Incentives Study, March 2011; http://www.pwc.co.uk/human-resourceservices/publications.
226 For informal discussion purposes; formal legal distinctions are used when required.
227 FSA, Policy Statement 10/20: Revising the Remuneration Code – Feedback on CP10/19 and final rules,
2010; www.fsa.gov.uk/pubs/policy/ps10_20.pdf.