The Bank argues that buy-outs, in which a firm compensates a new employee for any unpaid remuneration that is cancelled when they leave their previous firm, have the potential to undermine the effectiveness of the current remuneration rules.

When a new employer buys out an employee’s cancelled bonus, the individual becomes insulated against the possibility of their awards being subject to ex-post risk adjustments through the application of either malus (withholding or reduction of unpaid awards) or clawback (recouping of paid awards). The Bank says this means individuals are effectively evading accountability for their actions.

The plan is to introduce rules that mean buy-outs should be managed through the contract between the new employer and employee. The employment contract would allow for malus or clawback to be applied should the old employer determine that the employee was guilty of misconduct or risk management failings. The proposed rules would also allow new employers to apply for a waiver if they believe the determination was manifestly unfair or unreasonable.

Andrew Bailey, deputy governor for prudential regulation and CEO of the Prudential Regulation Authority (PRA) said: ‘Having the right incentives is a crucial part of an effective accountability regime. Remuneration policies which lead to risk-reward imbalances, short termism and excessive risk taking undermine confidence in the financial sector. Individuals should be held accountable for their actions and not be able to actively evade the consequences of their actions.

‘The proposals seek to ensure that individuals are not rewarded for bad practice or wrong-doing and should help to encourage a culture within firms where reward better reflects the risks being taken.’

The consultation closes on 13 April and details are available here

Sign up to our newsletter

If you would like to receive regular news alerts about breaking news and developments in tax, accounting and audit, sign up to receive our free newsletter here