There may be some significant changes in the pipeline for City workers,
affecting the amount and method of their bonus payments, as well as their
ability to freely talk about them - and other elements of their compensation
package - in the workplace.
A recent case involving a $120 million loss by a Morgan Stanley derivatives
trader may signal the need for greater self-regulation by City employers in
the way in which bonuses are paid and employees incentivised. In addition,
the proposed Single Equality Bill, due in the next Parliamentary session,
would provide for greater transparency in the workplace regarding pay by,
among other things, prohibiting employers from curtailing employees’ ability
to tell their colleagues and others how much they are paid.
For many employers, these changes present some unique challenges, not only in
the way in which they have traditionally compensated employees but also in
the way in which, historically, they have tightly controlled what they do
and say.
City bonuses have been the focus of much Government and media attention.
Although at various times the Government has expressed concern over their
level and structure, particularly regarding their role in promoting
excessive risk-taking behaviour, it has yet to take any affirmative steps to
intervene. However, even if the Government does nothing to change the way
bonuses are paid, the City may need to make some changes itself in order to
protect against the type of high-risk behaviour leading to the recent Morgan
Stanley case or the more significant losses at Société Générale some months
ago.
The individuals involved in both cases were certainly responsible for their
own actions, although their employers are also vicariously liable, whether
they were aware or not. However, from an institutional and industry-wide
standpoint, the employees’ motivation for taking huge risks is often
propelled by the desire to rack up their performance to a high enough degree
to result in a high year-end bonus. Therefore, any effort to properly
address this issue must also consider the existing bonus culture.
Traditionally, most banks and other employers in the financial sector pay
bonuses at the end of the fiscal year on a discretionary basis. Legally,
there is no limit to the amount of bonus payments, as long as the employer’s
discretion is exercised in a "non-capricious" manner.
By extending the snapshot period during which the performance of the
individual employee and the business is judged, such as awarding bonuses on
a rolling two to three year basis instead of the traditional year-end model,
any attempt to massage profits will be apparent in the subsequent financial
year, taking away the incentive to overstate profits or “massage” the
figures. Furthermore, bonuses could be awarded in two stages: at year-end
and again mid-way through the following financial year, thus preventing
inaccurate profit figures being forced through in a shorter window of time
in order to maximise the year-end bonus figures.
If the City is to make any moves in reshaping its bonus structures, now is the
time. Jobs are scarce and bonus expectations generally low. Employees and
potential employees are much more likely to accept terms which may have
seemed more Draconian last year. From a purely legal perspective, most
employers do make sure that a wide discretion is written in to employment
contracts, giving them enough flexibility to change their methodology for
calculating bonuses. In market terms, City employers will find it easier in
the present market to change the terms of their agreements to reflect a new
bonus structure for new and incoming employees. As to existing employees, by
managing their current bonus expectations early on, employers can ease the
eventual transition into a new regime governing all employees.
Taking care that the process is transparent, that the reasons behind the
change are based on improving corporate governance and that the results are
fair and non-discriminatory (ie, not unfavourable to legally-protected
minorities), the financial sector could do much protect itself and its
employees from future Morgan Stanley and Société Générale cases.
Although some employers may be concerned about losing the ability to attract
and keep key talent by changing the existing bonus structures, there would
be nothing stopping financial institutions from offering generous “golden
hello” packages or offering a guaranteed first-year bonus to maintain their
competitive edge as employers. Properly managed and implemented, these
models offer City employers the opportunity to discourage employees from
looking myopically at bonus-related year-end results whilst encouraging them
to take a longer view of their own performance within the context of the
business as a whole.
Another significant change in the City workplace has to do with the way in
which employees discuss and divulge their bonuses and other elements of
compensation. Many City employers prohibit employees from divulging any
information about their amount or method of compensation, classing such
disclosure as gross misconduct, which may give the employer the right to
dismiss the employee summarily (ie immediate termination without notice or
pay in lieu). Traditionally, this has been based on concerns that by making
his or her - usually higher - compensation public, an employee could cause
morale problems and fuel complaints in the workplace of inequality of
treatment and pay.
Observing that it would usually be a male employee’s higher salary which is
kept under wraps, the Government has attempted to tackle gender
discrimination, especially “sexism in the City” (as noted by Baroness
Andrews in her statement to the House of Lords) with a new “kite-mark”
system that would challenge employers to report on workplace equality and,
among other things, outlaw provisions in employment contracts prohibiting
employees from disclosing their pay to one another.
Ostensibly, it is the Government’s hope that making City pay structures more
transparent would help close the pay gap between men and women. However, the
difference in pay between male and female employees, or between employees of
different races or age groups, may have nothing to do with discrimination.
Outlawing pay secrecy provisions could open a Pandora’s box, even where no
laws have been broken at all. For example, although a senior male employee
may be well-rewarded for his higher levels of competency and performance, it
is easy to imagine how knowledge of his higher compensation package could
translate into claims of evidence of gender or age discrimination leading to
a potential increase in claims.
It is important to reiterate that both of the issues discussed above are still
in the pipeline – they have yet to become reality. It is possible that the
Government may do nothing about bonus structures. It is also possible, but
not probable, that some or all of the provisions of the Equality Bill will
never make it through the House of Lords. However, for the prudent City
employer, the writing is already on the wall. The key is to self-regulate
where necessary, before being regulated by the Government.
The authors are partners at Peregrine Law LLP, a specialist employment law
firm
The proper method of addressing excessive risk-taking is to expose people to the full consequences of their own risks, rather than prohibit them from doing things deemed to be risky in the first place. Liberty and responsibility are superior to repression and irresponsibility.
James E. Petts, Burnham, England