International Financing Review, July 2012 – Stephen Gilchrist comments on JP Morgan
JP Morgan clawbacks offer false blueprint
By Sandrine Bradley
JP Morgan potentially clawing back compensation already paid to its chief executive Jamie Dimon and a number of senior London bankers over the bank's recent losses is unlikely to be a blueprint for future incidents.
A remuneration code from the UK's Financial Services Authority that came into play in January 2011 sets strict parameters as to what can be involuntarily clawed back. Clawbacks at JP Morgan seem to go beyond those, indicating voluntary agreement or separate binding obligations.
In the first high profile use of the clawback mechanism, Dimon last week publicly announced that he would return two years worth of cash and stock bonuses. This follows the Chief Investment Office debacle, which culminated in a US$6bn trading loss for the bank.
The US bank said that three CIO managers in London responsible for the synthetic credit portfolio have been let go with no severance and no 2012 incentive compensation. JP Morgan aims to clawback earlier pay representing some two years of total annual compensation for each individual, including restricted stock and stock options.
There are more than 2,500 firms - including JP Morgan in the UK - that come within the scope of the new FSA code, which is based on the original FSA Remuneration Code first published in August 2009.
The code itself sets out how much of an employees' annual compensation is to be paid out immediately, and how much of it is deferred. The deferred portion of the bonus - both cash and shares - is then held in trust by the bank over a number of years. It is only this deferred portion that banks then have the right to reclaim if things go wrong.
According to a JP Morgan spokesperson, Dimon's clawback will include at least everything that comes under the code and "maybe more". But the potential clawback of additional compensation, which could include cash bonuses already paid out, is either something Dimon has agreed to voluntarily or agreed to in his contract.
"It makes sense that if a senior manager has potentially caused damage to a bank that both parties agree a sensible way to deal with the problem without too much overt publicity," said Stephen Gilchrist, head of regulatory law at Saunders Law. "It could also be subject to contract with the bank entitled to claw back compensation when an employee has caused material loss to the bank."
Under the code, a bank is not entitled to claw back any compensation cash or stock that it has already paid out to the employee.
"There is a lot of misunderstanding around the clawback mechanism and how it actually works," said an insider at one UK investment banking association. "If the bonus has been transferred to the individual then it is their property and it cannot be reclaimed."
Under the code, Tier 1 and Tier 2 credit institutions and broker dealers that engage in significant proprietary trading or investment banking activities have to defer at least 40% of variable pay over a period of between three and five years.
At least 60% must be deferred if the variable pay is more than lb500,000. At least 50% of the variable pay must be in shares, which the employee must hold for at least six months. The code states that the firms can withhold, or claw back, payment if performance criteria - either financial or non-financial - are not met.
"In general clawbacks do not happen very often and it is really all about what level a person is at," said Andrew Breach, head of corporate banking, investment banking, markets and asset management at Michael Page Financial Services."At the lower level it is more difficult to quantify when a trader for example has not performed well, especially in the current volatile markets."
"Also the reality is that more junior employees will simply not have the money that has already been paid in salary or cash bonuses in the bank to pay back," he added.