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James Crosby's mea culpa shows the need for a better system of pension clawbacks. The former HBOS chief executive officer wants to hand back his knighthood and 30 per cent of his pension. At least he has taken the initiative rather than being forced into it, following stinging criticism of his tenure in a U.K. parliamentary report last week. But it shouldn't depend on a former boss's conscience – a system is needed to recoup entitlements.

Former Royal Bank of Scotland CEO Fred Goodwin suffered a similar fate in 2009. His £555,000-a-year ($864,000) pension was cut by 38 per cent to £342,500. Sir James Crosby is giving up 30 per cent of his, taking him down to £406,000 a year. Mr. Goodwin was also ignominiously stripped of his knighthood.

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By getting in first on both his title and his pension, Sir James should escape the full weight of the opprobrium heaped on Mr. Goodwin. But it's still an unsatisfactory result. For one thing, he will continue to collect a big annual reward for failure. More importantly, potential bank chief executives may balk if contractual entitlements are at risk of becoming unsustainable under popular and political pressure.

What's needed is a proper protocol. One method would be to link the value of pension payments to what happens to the bank's shares. A crude approach might be to relate at least part of a former boss's pension to contingent convertible instruments that lose value if the lender needs more capital.

Another might be to convert pension pots into equity, priced at the level at which other shareholders buy in if new capital is needed. In mid-2008 HBOS undertook a big rights issue at £2.75 a share – already a far lower price than when Sir James left in 2006. Each share was later swapped for 0.6 share in Lloyds Banking Group, which took over HBOS. With Lloyds stock now trading at 47 pence, Sir James Crosby's pot would have tumbled in value by 90 per cent.

That might seem harsh, but it's no more than HBOS's own investors have lost over the same period. And it needn't be the whole pension entitlement that's at risk. What's clear, though, is that when top bank executives get outsized benefits, mob rule isn't the right response if their former fiefdoms run into trouble. Clawbacks need to be built in from the start.

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