The United Kingdom Prudential Regulation Authority and Financial Conduct Authority have adopted new rules regarding the remuneration of senior managers at UK banking institutions. These rules address the potential clawback of paid variable remuneration and deferral of unpaid variable compensation (e.g., bonuses) for performance periods beginning January 1, 2016. The goal, claim the regulators, is to better align risk and individual reward in the banking sector and to encourage more effective risk management. Under the new rules, unpaid variable remuneration will now be paid over seven years for senior managers, five years for risk managers and three to five years for material risk-takers (e.g., traders), while a clawback of variable remuneration for misconduct may occur up to 10 years after payment for senior managers.
My View: I accept that imposing deferrals and potential clawbacks on senior executives' bonuses theoretically helps improve the compliance culture at firms by better aligning compensation with risks. However, when the period of time for deferrals and potential clawbacks is too great it causes an implicit discount of potential compensation in the minds of recipients that disrupts the alignment. Potential compensation too far in the future that is effectively written off immediately is not likely to serve as an inducement to better behavior today. The durations imposed by the UK regulators are likely too long to influence behavior in the manner contemplated.