The credit crisis has led to strong criticism of remuneration practices in the financial services sector and in the wider economy. There is a perceived misalignment between the short-term nature of the bonus culture and longer-term interests of shareholders and wider stakeholders.

The FSA has recommended that executives will be better incentivised to manage risk if short-term cash incentives are deferred into long-term share-based awards and, in certain circumstances, a clawback of bonus payments may also be appropriate.

Deferring a cash award into a performance-related share award is an effective way of aligning the interests of executives and shareholders because the number of shares delivered to the executive is scaled back if company performance is not achieved and the value of the reward tracks the market share price.

Under a deferred bonus arrangement, the company calculates the cash equivalent of the executive's annual bonus and, instead of paying the bonus in cash, the company grants the executive a conditional award over an equivalent number of shares.

Companies may already have in place a long-term share plan which is flexible enough to operate with a deferred bonus arrangement. Main list companies will need to obtain formal shareholder approval for new share plans involving new issue shares or which grant any performance-related awards to directors.

Bonus clawback raises considerable legal and practical enforcement difficulties for employers. An employer's ability to recoup an already paid-out bonus from an executive depends on the executive having sufficient assets, which might not always be the case. In addition, the reputational and monetary costs of enforcement (particularly where the executive has left employment) may make legal proceedings cost prohibitive.

Further, any tax and national insurance liabilities accounted for by the executive and the company in relation to an already paid-out bonus could not then be reclaimed from the tax authorities in the event of a clawback.

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