In response to increasing demands for transparency, compliance, and sustainable performance, clawback and malus clauses are becoming essential components in the structuring of variable remuneration schemes in the Luxembourg financial sector.
A malus clause allows the employer to reduce or cancel variable remuneration prior to payment in cases of ethical misconduct, performance failure, or compliance issues. By contrast, a clawback clause enables the retrospective recovery of bonuses already paid when irregularities or misconduct are revealed. These mechanisms may apply to cash bonuses, free shares, or stock options.
The underlying objective is clear: to hold beneficiaries accountable, in alignment with performance, regulatory compliance, and effective risk management. These clauses reflect a clear intention to restore discipline and to align employee’s interests with those of the company in a sustainable way.
Following the excesses exposed during the 2008 financial crisis, the widespread adoption of such clauses by financial institutions has been strongly encouraged and subsequently formalised through European legislation (CRD IV, CRD V, Regulation (EU) 2021/923), which mandates the implementation of such mechanisms, as well as the identification of “risk takers”. Moreover, the European Banking Authority (EBA) recommends activating these clauses in clearly defined cases (fraud, material errors, gross misconduct, and insolvency of the entity affected by the beneficiary’s decision).
In Luxembourg, the CSSF ensures strict application of this framework through a dedicated set of regulations (CSSF Circulars 10/437, 12/552, 20/758), which imposes strong remuneration governance. These clauses must be expressly provided for in contracts or internal policies, tailored to the risk profile, and drafted in a manner that is clear, proportionate, and legally sound.
In practice, implementing these clauses requires a high degree of precision and legal robustness. A lack of clarity may lead to litigation. In addition, their tax treatment remains complex, as the recovery of an amount already taxed requires specific steps with the tax authorities.
Their adoption is therefore not merely a regulatory obligation. It reflects a broader rationale of responsible and sustainable management aligned with long-term performance. For Luxembourg market participants, integrating such clauses means responding to the expectations of the regulator while building an internal culture of accountability and financial discipline.
Maître Sabrina Martin advises and assists you in aligning your variable remuneration practices with evolving regulatory expectations.