Going global with clawback
22 October 2014
Everything is global these days. Brands and trends across popular culture “go global” like never before across the high streets, theatres, music venues and social media through Sydney, Hong Kong, Berlin, London, New York or Paris. Employers, too, are going global, as more and more companies with global reach want to move towards standard terms and conditions of employment and policies across their global workforce. Companies want their global workforces to feel like they are in the same “corporate family”. But in practice, and in some key areas of the employment relationship, creating the same corporate family across a global workforce can be a real challenge.
"Clawback" presents such a challenge; the idea that something that has been given, is taken away at a later date. Much like giving candy to toddlers who react badly when you take it off them, so, too, do bankers and city workers when their employers award them bonuses and then seek to take them back at a later (in some cases now, much later) date! Clawback in whatever form, as a concept, is universally unpopular! But, popular or not, the financial regulators in the UK, the PRA and FCA, will now require clawback to be a central feature of remuneration policies for regulated firms in respect of bonuses made after 1 January 2015. As a minimum, where there is reasonable evidence of misbehaviour, material error or a material failure in risk management, from January 2015, bonus awards need to be capable of being clawed-back in full. The threat of clawback shall last at least seven years, or ten years if an employee is a “Senior Manager” where an internal or regulatory investigation is underway at the end of the seven-year period.
UK-headquartered firms will be expected to apply these obligations across their global operations. But is clawback a global concept? No, it isn’t. While clawback is challenging to enforce in the UK in light of the law against unlawful penalties, clear drafting, robust evidence and commercial justification in the circumstances can get employers over the line. This can also work in locations such as Hong Kong, Singapore or Australia where employers have shot an enforcing clawback. But the same cannot be said of Germany and France, where clawback is simply unenforceable for either past or future awards. In the U.S., it is possible to enforce clawback but by no means easy, while in neighbouring Mexico clawback is unlawful in any form and almost unheard of in Brazil where there are strict rules around any detrimental changes made to employment conditions.
The unenforceability of clawback provisions across many key jurisdictions for global businesses in the finance sector makes life tough for global employers moving towards global employment conditions and remuneration policies. Senior executives in jurisdictions like the UK will potentially face the threat of clawback for up to ten years from grant, while colleagues based in other jurisdictions on the continent or in emerging markets can sleep easy at night knowing clawback is scuppered by local labour laws. These employees will almost certainly not feel part of the same corporate family when it comes to the structure of variable pay. Alternative strategies will need to be adopted for those countries where clawback is unenforceable; such as making greater use of "malus" which takes back the bonus (or sweets) before it actually belongs to the individual. Same sentiment but, somehow, more acceptable because the prize was potential rather than real. Global employers will need to think carefully to ensure that their global remuneration policies don’t cause any family arguments.