The financial authorities are speeding up the introduction of a compensation clawback system to recoup bonuses from those responsible when financial accidents occur. Financial accidents are increasing every year, yet executives and employees at financial companies such as banks, which are posting record-high results, are avoiding responsibility and enjoying a bonus feast, critics say. Eradicating the practice of shifting responsibility for financial accidents was also one of President Lee Jae-myung's campaign pledges.
According to the financial sector on the 4th, the financial authorities plan to revise the Act on Corporate Governance of Financial Companies to introduce clawbacks. An official at the financial authorities said, "We are reviewing legal amendments to introduce clawbacks, as mentioned during the National Assembly audit." Earlier, Financial Services Commission (FSC) Chairman Lee Eog-weon, responding to People Power Party Rep. Lee Heon-seung's point that "financial accidents are surging while executives' and employees' performance bonuses are rising sharply," said, "If a financial company incurs losses, we will review a system to recoup already paid performance bonuses," signaling his intent to introduce clawbacks.
There is also talk of specifically presenting conditions for bonus recovery in the supervisory regulations and the enforcement decree on the governance of financial companies. Article 9, Paragraph 3 of the current supervisory regulations on the governance of financial companies states, "If a loss occurs to a financial company in connection with the duties performed during the deferral payment period, performance bonuses scheduled for deferred payment shall be recalculated to reflect the realized loss." A financial industry official said, "There are provisions that could serve as a basis for introducing clawbacks, but the content is vague, and the reasons or procedures for adjusting or recouping bonuses are unclear, so actual clawbacks have been extremely rare." According to the Financial Supervisory Service's inspection, last year the total amount of performance compensation recouped across the financial sector was 90 million won, just 0.01% of the aggregates of performance bonuses paid (1 trillion won).
Previously, when seeking ways in 2023 to improve "banking sector management, sales practices, and systems," the Financial Services Commission (FSC) reviewed introducing clawbacks but backed down in the face of opposition from the financial sector that said there was a high risk of legal disputes. If executives and employees whose bonuses were clawed back could not accept it and filed lawsuits, the backlash could be significant. At the time, the FSC said, "Recouping performance bonuses that have already been paid is difficult to apply in practice due to potential legal disputes," and limited its action to adjusting the deferral ratio (40%→50%) and period (3 years→5 years) for executives' performance compensation.
As President Lee drew his sword to curb short-term performance orientation and the shifting of responsibility for financial accidents, the Financial Services Commission (FSC) changed its stance and is giving momentum to introducing clawbacks. Strong measures are also being considered to recoup executive bonuses if a financial accident such as a material error in financial statements is confirmed even after retirement. However, resistance from the financial sector is formidable. A commercial bank official said, "It could shake the foundations of the financial industry, where performance-based pay is key, and there is a high chance that conflicts and disputes between employees and companies will increase significantly." Earlier, when a 300 billion won embezzlement occurred at Kyongnam Bank, the bank sought to claw back part of the bonuses paid from 2021 to 2023, but scrapped the plan in the face of union opposition.
☞ Clawback
Meaning "to scrape back with a claw," it began to be adopted by financial companies in the United States and Europe that suffered massive losses during the 2009 global financial crisis. The system allows for the reduction or cancellation of deferred performance bonuses if executives or employees cause losses to the company or damage its reputation through unethical behavior. In the United States, under Securities and Exchange Commission rules, listed companies are required to establish mandatory clawback provisions for performance compensation.