FSA Remuneration Code for Bankers

12 08 2009

The FT is reporting today that the FSA has finally produced its remuneration code on how bankers should be paid.  I have only seen the headlines and brief summary of the proposals, but it seems that the FSA has shied away from being too prescriptive for fear of driving bankers abroad to less tightly regulated markets.  Expect a deluge of criticism to fall on top of the FSA, whose days are numbered if the Tories return to power at the next election.

The draft code stipulated that two-thirds of each bonus should be deferred and that individuals should be rewarded on the basis of the firm overall rather than just the individual or the business unit.  Apparently that isn’ t in the code to be published today. I posted last week on bonuses and clawbacks – click here to read it.

Undoubtedly the FSA will be criticised for not taking a more rigorous line, yet it is in a situation where it is damned if it does and damned if it doesn’t.  If they had produced a very stringent code the institutions would accuse the FSA of destroying London’s competitiveness as an international financial centre.  Other international regulators are not taking a hard line so why should the FSA?  In my view it would be a bad move to have a government body dictating pay – like the failed prices and incomes policies of the 1970s – and ask yourself this: if the state starts dictating what bankers can be paid, who will be next up for regulation?


Bonus Rage and Clawbacks

5 08 2009

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 Hysteria vs Expenses Sleaze

31 03 2009

The recent indignity suffered by Home Secretary Jacqui Smith over her husband’s viewing of two “adult” films, which she then submitted as part of her parliamentary expenses claim got me thinking again about the slightly older furore over Sir Fred Goodwin and his humungus pension, and the ongoing hysteria over bankers’ bonuses.  I posted a couple of weeks ago on why I thought it unlikely that Harriet Harman’s threat to take government action to recover Sir Fred’s pension would be successful.  In the meantime Congress in the USA has got itself worked up into  a  lather over bankers’ bonuses and is considering a 90% rate of tax on all executives (from those institutions receiving state bail outs, particularly AIG) receiving compensation packages in excess of $250,000. 

When I posted on the subject originally, I said I thought that the politicians were merely trying to deflect attention from their own  inability to actually take meaningful action to mitigate the effects of the recession.  Nothing that has happened since dissuades me from that view.  Indeed reports in the newpapers suggest that President Obama has been coming under some pressure to do something and there are signs that his honeymoon period may be drawing to an end.  A report in the Financial Times on the 27th last was headline “America’s liberal lay into Obama” and he was accused “of taking dictation from the same financiers who have brought the economy to the brink of depression”.  Some of the (American) people I follow on Twitter are also incensed by his actions (ok, that’s not representative I know but the mood of optimism that greeted his inauguration seems to have withered).  America’s liberals! Heaven help the man!

Politics is never an easy world and politicians will always be criticised whatever they do.  What irks me in with these two particular issues though is how politicians were calling, effectively, for the rule of law to be pushed aside so that valid contractual relationships between employer and employee could be set aside to satisfy the public call for bankers’ blood (and make the politicians look like they were doing something) when at the same time politicians dissatisfied with their incomes are loading their expense claims up onto the taxpayer  bcause they feel their salaries don’t compensate the sufficiently.  Jacqui Smith gets a salary of £141,000.  Her husband, who acts as her parliamentary aide, gets a salary of £40,000 (if the newspapers are to be believed).  She lives in her sister’s house during the week (and that has been the subject of criticism already)  and claims an allowance for that.  I have no issue with what her husband chooses to watch on TV (although I do wonder how stupid he must have been to submit the cost as an expense).  Jacqui Smith is not alone in having her expenses questioned – and no doubt we will be hearing a lot more similar stories in future  –  but I do have an issue with the hypocrisy of politicians (as a class) who criticise bankers for greed when their own actions don’t pass scrutiny. 

I’m not surprised; it was ever thus but let’s just bear it in mind next time Harriet Harman, Gordon Brown, Alistair Darling et al start singling out sections of the working population for special treatment.

Bonus – what bonus?

10 02 2009

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

What will happen to bonuses?

16 10 2008

In normal times (and heaven knows we are not in them at the moment), people only really get interested in bonuses come January and February each year.  But because of the extraordinary events of the last week or so (I’m thinking particularly of the bail-outs of some of our biggest banks) there has been speculation over what it will mean for next year’s bonus round.  The speculation has been fuelled by comments from the Chancellor of the Exchequer that large bonus payments will not be tolerated at those banks that have been part-nationalised.  The wider media, always in search of an easy scapegoat, has leapt at the chance to have a go on the issue. In turn that has led some lawyers to discuss whether bonuses can be regulated or reduced.

Most people in the financial services sector have an entitlement to be considered for a discretionary bonus each year.  In some cases (such as when an employee has just joined a new company) the bonus may be guaranteed, but in most cases not.  The usual scenario of such schemes is that the employee has no contractual right to receive anything, although there has been some case law over the years on this issue.  

Matters reached a head on this issue in 2006 in the case of Commerzbank v Keen.  That case was about the level of bonus paid to an employee and it was held, by the Court of Appeal, that the burden of proof on the employee in these types of cases was very high because the employee would have to show that the employer’s decision to pay the level of bonus actually awarded was irrational or perverse.  That is a very high hurdle to overcome of course and, in the current climate where everyone in government from the Prime Minister and  Chancellor down is calling for bonus restraint, it is unlikely that a Judge in the High Court would have much sympathy with an employee seeking a much increased bonus, especially if the Bank in question was one of the ones propped up by the tax-payer.

This may well all be academic because most employees are probably just glad to be in work at the moment and won’t be anxious to bring trouble upon their heads by arguing about their annual bonus.  If, as expected, the economy does go into recession, the levels of bonus will be lower in any event, so the prospect of regulation, by the FSA or anyone else, will recede.  Indeed, the FSA through its new Chairman, Adair Turner, has ruled this out. I also can’t see the government legislating to restrict bonuses as this would really smack of the bad old corporatist days of the 1970s.  Nationalisation might be back but is a return to the prices and incomes policies of thirty years ago realistic? I don’t think so.  

This aticle will appear in the Docklands and Peninsula newspaper week commencing 20th October.