There continues to be fierce debate over “payments for failure" especially in organisations which have failed or have had to be bailed out by the government, and part of this debate has focused on the “clawback” of share awards to executives.
The premise behind clawback is that even if at the time of the receipt of shares the performance conditions were apparently met, if this later turns out not to be the case, the company should be allowed to clawback the shares (or some of them) in recognition of the changed circumstances.
But in fact any attempted clawback in the absence of specific provision in bonus or option plan rules is likely to be unlawful. And even if the rules do contain a specific authority to allow a clawback, there are still problems:
- The clawback could be challenged on the basis that it is, legally speaking, an “unfair penalty” on the executive. However this might only cause problems where the clawback is enforceable following a breach by the executive of his/her service contract and not, for example, where the clawback specifically applies in circumstances relating to assessment of performance only.
- Such a retrospective clawback could be held to be in breach of the executive’s human rights.
- There is no clear route for repayment of any income tax and national insurance contributions paid by the executive when s/he acquired the bonus/option shares.
- Including or using a clawback provisions could undermine the incentive effect of share/option awards.
This means that clawbacks must be approached carefully, and a more successful approach might be to defer the receipt of the shares/bonus by the executive following vesting. If you would like to know more about this, please contact either Maureen Burnside or Jacqueline McDonald in our Employee Incentives Team [New Window].
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