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Malus & Clawback: the Demise of the Unconditional Executive Bonus?

$41 million of share awards stripped from Wells Fargo & Co. C.E.O., John Stumpf€3.3 million frozen from the grasp of Deutsche Bank Executives. Given disparaging public scrutiny of executive remuneration and Government proposals for Corporate Governance Reform, does this indicate the demise of unconditional executive bonuses?

Executive pay levels continue to be subject to public scrutiny. One aspect of this is the application of malus and clawback provisions.

Broadly, malus provisions apply before awards or remuneration have vested or have been paid to an employee, whilst clawback provisions apply to awards or remuneration that have already vested or been paid to an employee. Given their differing ease of application, the triggers for malus provisions are often broader and remuneration committees may be afforded greater discretion in their application. They serve the function of aligning risk and individual reward for executives, and allow companies to reduce or recoup awards in defined circumstances such as financial misstatement, gross negligence, misconduct or fraud.

Originally, malus and clawback were applied in accordance with the Financial Services Authority’s (now the Financial Conduct Authority’s) Remuneration Code, extending to banks, building societies and investment firms. More recently, malus and clawback has been extended to public limited companies with the 2014 UK Corporate Governance Code recommending that all companies with a premium listing apply these provisions where it is appropriate to do so.

Furthermore, the Directors’ Remuneration Reporting Regulations now require that a company’s directors’ remuneration report contains an explanation as to whether any malus or clawback provisions have been applied.

When implementing malus and clawback provisions, consideration must be given to key factors including (but not limited to): taxation, employee domicile and triggers for malus and clawback. These triggers must be carefully drafted in order to reduce the risk of them being deemed unenforceable penalty clauses.

Pett, Franklin & Co. LLP are experts in employee share schemesshare valuations and executive incentives. To find out how we can help you or your client, please call Stephen Woodhouse on 0121 348 7878 or email Stephen at stephen.woodhouse@pettfranklin.com.

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