Bonus clawbacks and ‘malus’ arrangements are on the up, but this is the least of your pay worries

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In theory, Deutsche Bank’s decision to implement a tough new bonus structure that could clawback unvested shares awarded at a former employer may lead to an exodus of top talent. However, with so many banks cracking down on pay currently, it’s unlikely to put it at too much of a disadvantage.

The latest scheme arguably makes Deutsche the most punitive of all investment banks – it has a cash cap of €100k, requires any 70-100% of any bonus over €50k to be deferred and its ‘malus’ arrangements (ie, the risk of deferred awards being reduced or unpaid) are more wide-ranging than most.

The FSA rules around a new employer buying out deferred stock are quite simple – they’re allowed to do this, as long as the new arrangement isn’t any more generous in terms of the amount paid out or the vesting schedule. Performance criteria are applied, but these are usually easy to achieve.

“If Deutsche Bank is setting hard performance targets for deferred stock that has been bought out then it’s at a distinct disadvantage from other investment banks,” says Jon Terry, partner in the remuneration practice at PwC. “Most banks are setting ‘performance’ requirements, but these are so soft that the payment is practically guaranteed. Otherwise, why would they leave their previous employer?”

The bigger concern for the vast majority of investment bankers in the City is simply managing to hold on to a decent bonus this year. Across the board, Terry is anticipating a reduction of 30% this year, but this will be heavily weighted towards paying those people banks want to keep rather than the general populous.

The problem with clawbacks

In practice, actually clawing back money from employees is problematic. Although more banks – noticeably RBS, HSBC, UBS and J.P Morgan – have done so because of loss-creating behaviour, it’s still not common practice. As a Mercer survey revealed late last week, just 14% have actually used clawbacks.

“A ‘hard’ clawback raises the question of whether the gross or net amount is paid back, because if it’s the former then bank employees cannot claim income tax back from the revenue,” says Mark Ife, partner in the remuneration practice at law firm Herbert Smith. “Most firms are simply relying on ‘malus’ arrangements – essentially adjusting deferred payments according to performance.”

This is decidedly more common – 80% of banks have these arrangements in place, according to Mercer’s survey. It’s rare, however, that the performance targets are difficult to achieve; only 4% of banks suggest that they’re hard to reach.

The game changer

So, how are the majority of bank changing their bonus structure this year? Quite simply, says Terry, very few are making any radical adjustments.

“Some are considering longer deferral schedules, or performance criteria, but nothing radical,” he says. “The real game changer will be when the EU firms up its bonus rules, but until then most investment banks are still flitting around the edges.”

Here, again Deutsche Bank looks set come off worse. As we pointed to before, the new rules will apply to those holding ‘significant influence’ positions, rather than the rank and file staff. This includes “heads of key business units or control functions”. Deutsche, however, now has over 1,300 ‘Material Risk Takers’ after designating all MDs as regulated employees.

Others may have to follow suit and increase their numbers, with the European Banking Authority demanding the definition of regulated employees is tightened.

Where bankers can jump ship, they will

Post-bonus movement is now less of a concern for investment banks, but punitive bonuses are leading many to seek new opportunities. At Barclays, for instance, where cash bonuses were capped at £65k a number of key commodities staff have joined independent trading houses.

“US investment banks are still less restrictive on pay, and this means there’s still not a level playing field in the City,” adds Terry. “Add in the fact that the US and Asia still lag behind Europe on pay reforms, and there’s every chance investment bankers could start looking further afield.”