Feb. 10, 2012 at 3:18 PM ET
It's still early in the year, but "clawback" could be the word that haunts bankers' dreams in 2012.
After prodding from New York City comptroller John Liu, Goldman Sachs Group and Morgan Stanley recently disclosed details of the circumstances under which they could reclaim compensation from risk-taking traders and their bosses. Earlier this week, Swiss bank UBS AG said it would implement a large-scale clawback, restricting bonuses for top earners in its investment banking division after misdeeds by a rogue trader cost the bank $2.3 billion.
Executive compensation experts say clawback provisions are becoming increasingly mainstream and wider in scope, encompassing a broader array of trigger events and types of compensation. Some see this trend as a sign of progress and increased accountability in the freewheeling financial sector; however, some banks are already finding ways to use these clauses to their own advantage.
According to a study done by Equilar, an executive compensation data firm, the number of Fortune 100 companies with publicly disclosed clawback policies grew from roughly 18 percent in 2006 to just over 84 percent last year. Nearly half of these either adopted a new policy or amended an existing one within the last two years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act addressed clawbacks, but the Securities and Exchange Commission, which is in charge of the details, hasn't finalized the rules yet. "A lot of companies are tying to get out ahead of this and prepare for clawbacks," said Aaron Boyd, Equilar's head of research.
Some clawback policies look beyond the activities of a single employee. At UBS, the entire class had to stay after school because of one troublemaker. Goldman Sachs and Morgan Stanley specified that managers could face clawbacks if their underlings take excessive risk or exercise other misconduct.
"Some people believe that if everybody pays a price, [employees] will be more likely to pay attention" and take action if they think a colleague's activities could jeopardize their payout, said Barry Gerhart, professor of management at University of Wisconsin. "It's a way to hold people accountable, longer-term."
The newly-public details of the Goldman Sachs and Morgan Stanley policies, along with the actions of UBS, will add momentum to this trend, Gerhart said. "Key players have a big influence on what the rest of the industry does." If a few prominent financial firms implement and enforce clawbacks, he said, "It'll put pressure on other companies to follow, even if it's not regulated."
"I think once you get someone stepping out and saying, 'We're doing this,' two things happen," said Steven Hall, managing director of Steven Hall & Partners, an executive compensation consulting firm. "First, companies feel a little stronger in doing these kinds of things themselves; they've got an example to point to. Secondly, it probably makes executives a little more nervous about what they're doing" he said. In theory, this makes it less likely that top brass will cultivate a culture of excessive risk-taking.
But companies already have found a way to work these provisions to their advantage, using them in a manner perhaps not intended by regulators. Equilar's report notes that some companies are already using clawbacks as a tool to retain employees or keep them from being poached by a competitor. Investment bank Jefferies Group put one-year clawbacks on its 2011 discretionary cash bonuses; if the employee takes a job at a competitor, the firm gets to reclaim the money.
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