Two Cheers for JP Morgan's "Clawbacks"

JP Morgan Chase has used its internal compensation recovery policies to "clawback" two years of "total annual compensation" for London traders involved in what is now a $5.8 billion derivatives loss: Bruno Iksil (the "London Whale&quot ; another trader, Javier Martin-Artajo; and their boss, Achilles Macris. All three have also left the firm with no severance pay.

So says Michael Cavanagh — who has been cleaning up the trading mess for JPM CEO Jamie Dimon — on the company's quarterly earnings call. On the same call, Dimon himself announced that the global supervisor of the London office and head of the firm's retired Chief Investment Office (CIO), Ina Drew, would voluntarily give up the "equivalent to the maximum clawback amount." Ms. Drew earned $15.5 million in 2011, including $7.5 million in stock awards, and also was due as much as $14.5 in severance according to this year's Proxy Statement.

As to all other employees, including Dimon, Cavanaugh said that "2012 performance year compensation and clawbacks, if appropriate, will be determined in the ordinary course." Dimon himself, who oversaw the CIO, could well have his 2012 compensation cut as a result of the trading problems.

These announcements are important developments in showing how financial service firms (as well as other companies) can use voluntary adopted compensation recovery policies to discourage bad behavior and excessive risk-taking. Six weeks ago, I argued that JP Morgan could win back some of the reputation lost from the large trading losses and poor risk management by transparently holding those responsible to financial account under its own policies, which are much broader than the mandatory clawbacks contained in Dodd-Frank.
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The criticism of the "clawbacks" are in the bottom of the article: http://blogs.hbr.org/cs/2012/07/two_cheers_for_jp_morgans_claw.html