Britain reins in its company bonus culture

One result of American business scandals over the past two decades is that more companies are careful about their pay incentives for executives. In the past, a shortsighted culture of cash bonuses in corporations encouraged reckless risk-taking and corruption. Recent reforms, however, either done voluntarily or by regulation, have held managers more accountable. They allow bonuses only for long-term results or recoup compensation in case of wrongdoing.

Case in point: On Wednesday, Starbucks shareholders rejected the company’s plan for millions of dollars in special executive pay. Critics said performance bonuses have been too frequent and unjustified.

Now Britain wants to join the United States in finding the right balance for pay incentives. On Thursday, the U.K. business secretary, Kwasi Kwarteng, proposed rules to make it easier to claw back bonuses already paid to executives in failed companies as well as stop future payouts. In addition, larger companies would need to file “resilience statements” that spell out risks to a business, such as climate change or potential fraud in external partners.

The proposed regulations “would help to get more transparency and, frankly, honesty in the system,” Mr. Kwarteng told The Times. “When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab.”

The proposed rules would also “hit auditors and rogue directors who have been asleep at the wheel,” another minister said.

Britain feels burned by its own recent business scandals, especially the 2018 collapse of construction firm Carillion. The company paid record dividends and bonuses just weeks before warning it was in trouble. The new proposals, which may take effect in 18 months, are described as the biggest shake-up of British corporate governance rules in decades.

Corporations that claw back or suspend bonuses at a time of failure or scandal are helping to build a better company culture. Studies show such policies improve the quality of a company’s financial reports, providing better clarity and certainty. Honesty can be its own reward, far more than a yearly bonus.