Diamonds Are Not Forever

The resignation of Bob Diamond as Chief Executive Officer of Barclays Bank last week has again raised the prospect of the clawback of executive remuneration. We have previously highlighted developments in Australia relating to the introduction of such provisions (refer to our April 2012 Newsletter).

Diamond resigned following a week of political outcry over the bank’s admission that it had manipulated interbank lending rates in 2008, resulting in a £290 million fine by UK and US regulators.

Diamond had come under heavy fire from shareholders last year after being awarded £25 million despite the bank’s return on equity falling from 7.2% to 5.8%, its share price falling by almost a third and underperforming the broader banking index. His award last year comprised a base salary of £1.35 million, a £2.7 million bonus, £14.8 million in future share awards and payment by the bank of a personal £5.75 million tax bill resulting from his relocation from his native US to London.

The company narrowly avoided a full scale investor revolt at its annual meeting after Diamond agreed to tougher conditions being imposed on the future payment of his bonus and a promise to increase dividends. He had subsequently elected to waive his bonus for this year. Whilst the shareholder dissatisfaction had resulted in additional restrictions being placed on his bonus and his election not to be paid this year’s bonus, there was no suggestion of any clawback of the remuneration awarded.

At issue now is the potential clawback of the £14.8 million in future share awards granted to Diamond last year, representing his entitlement under the bank’s long term incentive plans. Remuneration experts have indicated the likelihood of the Board clawing back £4.27 million of this amount, representing outstanding deferred share awards relating to past performance, and a material reduction in the £10.5 million share award he is due to receive in respect of future company performance over the next few years. According to the bank’s annual report, deferred awards can be recovered in the event the bank’s reputation is harmed or where there has been a material failure of risk management.

From a broader perspective, the developments provide invaluable insight into the issues associated with pay-for-performance alignment and the structure of executive reward.

Diamond will be paid a minimum of his current base salary (£1.35 million) plus a contractually agreed £2 million pension contribution as part of his severance package. These amounts are dwarfed by the £120 million he is purported to have received in salary, benefits, bonuses and share awards since joining the company’s Board in June 2005.

Stop Press: Overnight, Bob Diamond has reportedly voluntarily given up his entitlement to remuneration worth up to £20 million. Whilst this will no doubt be characterised as a win for shareholders of Barclays, it would have been interesting to see how much (if any) of the relevant amounts would have been clawed back and the basis for any clawback under the company’s executive remuneration policies if Diamond had not voluntarily relinquished his claim to the various payments.

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