The Prudential Regulation Authority (PRA) has issued a consultation paper on buy-outs of variable remuneration. Under its existing rules, deferral of variable remuneration is required to allow financial services firms the opportunity to reassess the nature, scale and outcomes of the risks taken to more adequately assess the performance for which these bonuses were awarded; if unpaid awards are found to be unjustified, they can be reduced (“malus”). However, where employees move employers it is not uncommon for awards to be bought out. In the view of the PRA, this undermines the effectiveness of malus and clawback since individuals can move employers, get their bonuses bought out, and then insulate themselves against a later risk adjustment In its view, by moving employers and having their cancelled bonuses bought-out, individuals are effectively able to insulate themselves against an ex-post risk adjustment of their past awards as risks crystallise or the consequences of poor risk management emerge at their former employer.
The PRA proposes a new rule on buy-outs of variable remuneration, relating to the practice in which firms recruiting employees “buy-out” deferred bonus awards that have been cancelled by their previous employer. There would be a contract between new employer and the individual, under which the new employer would be expected to claw back sums paid if it receives notification from the old employer.
The consultation paper closes on 13 April 2016.