In the UK, the only companies which are subject to any cap on the levels of bonus paid to employees are banks, with a maximum limit of one year's pay applying to bonuses on performance after 1 January 2014 (i.e. to bonuses paid after 1 January 2015). The cap may be increased to two times base salary with shareholder approval. Banks and other financial institutions which are subject to the Remuneration Code are also subject to a range of binding rules concerning:
- restrictions on the payment of guaranteed bonuses and bonus buy-outs;
- deferral, with between 40% and 60% of variable remuneration subject to deferral for periods of between three to five years;
- payment in equity-like instruments, with at least 50% of variable remuneration being required to be paid in non-cash form;
- forfeiture and/or clawback in respect of unvested variable remuneration in circumstances where evidence of employee misconduct comes to light or in circumstances where the business suffers an unexpected deterioration in its performance.
Regulators are currently consulting on proposals requiring banks to retain the right to claw back vested variable remuneration, including bonuses already paid to employees. Some are suggesting that the deferral period should be increased.
Taken together, these proposals could result in bonus payments being 'at risk' for up to 16 years after the date they were awarded, making bonuses look more like an odd form of pension provision, rather than an immediate reward for exceptional performance.
Many employers in other sectors are looking at the practices being adopted by banks when it comes to remuneration policy, especially the payment of variable remuneration. They are also looking at tightening up the basis on which bonuses are being paid and the conditions attached.
In this respect at least, banks are leading the way in relation to best practice. Employers outside the financial sector may not wish to go as far as mirroring the Remuneration Code but it could be food for thought for finance and HR departments to consider.
Stefan Martin is an employment partner at international law firm Mayer Brown
