Clawing Back Bonuses When Is It Enforceable?

25/05/2012

By Duncan Jones, trainee solicitor, Fox Williams LLP

An employee’s entitlement to a bonus or share incentive used to be a one way street — once payment conditions under the bonus agreement were met, the employee would be entitled to the bonus and that was that. However, in recent times, employers, mainly international banks, have started clawing back parts of bonuses following events which come to light after the bonus was awarded. How can this be done without triggering successful tribunal claims?


When are clawbacks being used?

Bonuses tend to be paid annually to employees in cash. However, more often than not in the...

...City, significant chunks of bonuses are now paid under deferred incentive plans. Under such an arrangement, performance is measured over a period of time and the bonus is deferred accordingly, thus providing an incentive to the employee to perform well. It is these deferred incentive plans which are being clawed back in practice.

Below are a few examples of how clawbacks are being used in practice:

- Where a bonus was paid on the basis of performance which was later found to have been overestimated.

- During an express restricted period of time after the bonus was paid, a specific negative development occurs, triggering the clawback. For example, it has been reported that a number of Lloyds directors are being forced to surrender significant parts of their bonuses following the decision to pay £3.2 billion in compensation to customers who were wrongly sold Payment Protection Insurance. In addition, UBS has disclosed that SFr 200 million in bonuses awarded in 2010 have been forfeited as a result of the bank suffering a $2 billion loss last year due to unauthorised positions being taken by a London trader.

- When an employer discovers that the bonus was paid at a time when the employee was... continued on page two >

 

 

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