Clawback (CP6/14)
Submission to the Bank of England Prudential Regulation Authority
Chartered Institute of Personnel and Development (CIPD)
May 2014
Background
1. The CIPD is the professional body for HR and people development. We have
over 130,000 members internationally – working in HR, learning and
development, people management and consulting across private businesses and
organisations in the public and voluntary sectors. As an independent and not-forprofit organisation, the CIPD is committed to championing better work and
working lives for the benefit of individuals, businesses, economies and society.
2. Public policy at the CIPD exists to inform and shape debate, government policy
and legislation for the benefit of employees and employers, to improve best
practice in the workplace, to promote high standards of work and to represent the
interests of our members at the highest level.
3. Our membership base is wide, with 60% of our members working in private
sector services and manufacturing, 33% working in the public sector and 7% in
the not-for-profit sector. In addition, 76% of the FTSE 100 companies have CIPD
members at director level. We draw on our extensive research and thought
leadership, practical advice and guidance, along with the experience and
expertise of our diverse membership base to champion better work and working
lives.
General comments
1. While the CIPD is not an expert on financial regulation, it is responding to this
consultation on behalf of its members because we do have insight around the
theory and application of reward and people management.
2. The CIPD has recently looked at HR management issues in the finance sector: in
June 2013 we published the research report Employee outlook: Focus on
rebuilding trust in the City, which, based on a survey of over 1,000 employees
working in the financial sector, explored issues of culture, values and trust. The
report found that at that time perceptions of excessive reward and concerns over
short-termism still prevailed.1
1
CIPD, Employee outlook: Focus on rebuilding trust in the City, June 2013.
3. In April 2013, the CIPD published the report Executive reward: A review of the
drivers and consequences, produced on the CIPD’s behalf by academics from
the London School of Economics and Political Science, which explored available
academic research into top pay, in order to highlight findings and consider the
implications for remuneration policy and practice. The report found that increases
in executive remuneration can in part be linked to the increased sophistication of
global companies, the disproportionate value that can be created by a few ‘stars’
in today’s economy, week remuneration governance leading to a ‘ratcheting up’
of top pay and overly complex remuneration packages that, in effect, lead to
executives being compensated for the complexity involved.2
4. Please see below our response to the questions set out in the consultation
document on widening the grounds of applying clawback and limiting its
application.
The proposal that the grounds of applying clawback should be as wide as the
grounds for malus
5. The CIPD is not convinced that ‘as in the case for malus, clawback should not be
limited to employees directly culpable of malfeasance’ but also include poor
performance. We support the idea of clawback where there is evidence of an
employee doing something bad (misbehaviour and/or material error). However,
we are not convinced that it can be applied sensibly to individuals whose actions
(with the benefit of hindsight) turn out to be just wrong and have resulted in a
material downturn. For instance, how will lawyers be able to determine whether a
particular set of decisions were reasonable given the information that was
available to the decision makers at that time? Or, how big does the financial loss,
or the failure in risk management, have to be before it becomes material, and
money and assets need to be seized? In addition, we have technical concerns
around such technical issues as tax payments, death, the valuation of assets,
and the time and cost required to renegotiate staff employment contracts.
6. The CIPD believes that in the case of poor performance focus should be placed
on adjusting or preventing the payment in the first place, so reducing the need for
2
CIPD, Executive reward: A review of the drivers and consequence, April 2014
clawback. This involves ensuring that the appropriate organisational culture,
individual behaviours and performance management system are in place. In this
consultation, there appears to be an assumption that remuneration policies alone
incentivise excessive risk-taking and short-termism and so the focus should be
on pay rather than on the wider people management practices that support, and
are supported by rewards, incentives and recognition.
7. HR departments already have many opportunities to reflect reward through malus
clauses, deferring reward over a number of years and reducing the amount of
remuneration before it is paid, through disciplinary action and dismissal. We
believe that the PRA should encourage employers to focus on ensuring that their
employees do the right thing, in the right way and at the right time in the first
place. We believe that clawback should only be used in the case of criminality.
The proposal to limit the application of clawback to a period of six years from
the point of vesting
8. We are not convinced that six years is an appropriate length of time for clawback
given many firms will already be deferring performance-based remuneration. For
instance, if the deferred vesting period is five years then that award, or part of it
(depending on the vesting arrangements), could be subject to clawback in 11
years’ time. We are not satisfied that this would work in cases of subsequent poor
performance or poor risk management. For instance, how would it be possible to
establish: whether such an approach to performance or risk was appropriate 11
years ago; who were the responsible parties; and the whereabouts of some these
parties now. We suggest that performance-related remuneration is subject to a
total deferment of six years, over which period it is subject to performancereduction, malus or clawback, depending on whether the incentive has vested.