what's in the news

Thanks to the recent revelation that five directors at Lloyds Banking Group, including the former Chief Executive, will be asked to return a combined total of more than £1 million in bonuses, the topic of bankers’ remuneration is well and truly back on the media agenda.

So-called “payments for failure” made at the various financial institutions which have received enormous amounts of support from public funds have been the subject of much tabloid ire throughout the economic downturn.

The arguments in favour of facilitating “clawback” or reversal of bonus and share awards have had added weight since the FSA’s determination that remuneration structures in banks may have encouraged some employees to ignore long-term risks in favour of returning short-term gains which ensured that they earned their incentives.

Any company considering clawback will have to be very sure of their legal footing before attempting to force its employees to return shares acquired under employee share options (or other share incentive awards), or to pay over the proceeds of the sale of such shares, or to pay back cash bonuses. Notwithstanding the fact that such action could jeopardise the future incentive effect of share options and bonus schemes and, more seriously, might undermine the entire employment relationship, effective clawback may be difficult for three key reasons:

Firstly, unless the terms of a share award or bonus clearly specify that shares or cash can be clawed back in certain circumstances, there will be almost no chance of an employer being able to recover shares, the proceeds of shares or bonus payments from employees.

Second, clawback might be prohibited as an unlawful penalty; a contractual term which obliges A to make a specified payment to B if A is in breach may not be upheld by the courts if the payment for breach is found to be a “penalty” clause.

Finally, a clawback provision in a share incentive or bonus scheme may be triggered on a breach by an employee (or former employee) of a restrictive covenant. If so, the clawback provision might be deemed to be an unenforceable restraint of trade.

Despite these difficulties, we consider that properly constructed clawback provisions can be successfully deployed in the right circumstances. For more information please contact:

Mark Symons
Partner, Employment
T: 0118 957 0340
E: msymons@pitmans.com

Richard Devall
Partner, Employment
T: 0118 957 0602
E: rdevall@pitmans.com