Bank of England proposes changes to bonus buy-out rules

Pay-Thinkstock-20141The Bank of England has laid out proposals that would enable bankers’ bonuses to be revoked after they have moved employer.

At present, employers can compensate a new employee for remuneration they would have received from their previous employer in a practice known as buy-outs. When a new employer buys out a new employee’s cancelled bonus from their previous employer, the individual becomes  insulated against the possibility of this being subject to malus or clawback, enabling them to effectively avoid accountability for any previous actions.

Under the Bank of England’s proposals, buy-outs would be managed through the contract between the new employer and employee.

This contract would allow for malus or clawback should the employee be found guilty of misconduct or risk management failings with their previous employer.

However, the new employer would be able to apply for a waiver if they believe the previous employer’s determination was unfair or unreasonable.

The proposed changes to bonus buy-outs aim to establish greater alignment between risk and reward, while ensuring that buy-outs do not undermine malus and clawback rules.

Andrew Bailey, deputy governor at Prudential Regulation and chief executive officer at the Prudential Regulation Authority, said: “Having the right incentives is a crucial part of an effective accountability regime. Remuneration policies that lead to risk-reward imbalances, short termism and excessive risk taking undermine confidence in the financial sector.

“Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions. Today’s proposals seek to ensure that individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.”

Alexandra Beidas, employment and incentives partner at Linklaters, added: “If these proposals are introduced it won’t be possible for someone to wipe the slate clean by changing jobs.

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“Where an individual moves bank and forfeited awards are bought out by their new employer, those new buy out awards will be forfeit if the person is found to have misbehaved or committed a material error in their former job.

“It remains to be seen if this will be workable in practice because it will involve sharing potentially sensitive information between banks.”