Corporate boards across the U.S. are weighing whether bosses who lose their jobs for bad behavior should surrender part of their compensation.
Several high-profile executives resigned or were ousted in the past year following allegations of misconduct, leaving the companies to deal with the fallout, which can include a damaged reputation, angry customers and a battered stock price.
Giving boards more leeway to recoup pay from those guilty of sexual harassment and other inappropriate behavior could provide a deterrent, but clawing back money under such circumstances may be easier said than done.
“Boards are still in the contemplation phase and we haven’t yet seen a wholesale shift to broader clawback policies, but conversations are definitely occurring,” said Jon Weinstein, a managing partner at Pay Governance, an executive-compensation advisory firm.
Even a whiff of wrongdoing can have consequences. In July, CBS Corp. fell as much as 6.6 percent after rumors swirled about a forthcoming New Yorker article detailing accusations of sexual harassment against then-Chief Executive Officer Leslie Moonves, 69. He stepped down in September and has denied the allegations.
Also this year, gambling regulators opened probes into Wynn Resorts Ltd. in the wake of claims that founder Steve Wynn sexually harassed female employees at his casinos. Such investigations can result in revoked gaming licenses or requirements that companies make certain changes, including forcing individuals to divest holdings. Wynn, 76, left the firm in February.
Most public companies in the U.S. have clawback policies modeled on a provision of the 2002 Sarbanes-Oxley Act, which requires that CEOs and finance chiefs give back some incentive compensation if it’s later determined that their actions contributed to their firms having to restate financial results.
But misconduct can be harmful in other ways and some boards have used clawbacks to punish people guilty of serious transgressions that didn’t result in restatements. Many financial firms boosted clawback policies in the wake of the 2008 credit crisis to show regulators and the public what types of behavior would no longer be tolerated, according to Weinstein.
JPMorgan Chase & Co., for example, recouped and canceled awards worth at least $100 million for employees involved in the 2012 London Whale trading fiasco, which caused losses of more than $6.2 billion. Wells Fargo & Co. clawed back, canceled and cut about $172 million in incentive compensation for several top employees, including ex-CEO John Stumpf, following a fake-accounts scandal that tainted the bank’s image and resulted in hundreds of millions of dollars in fines and legal settlements.
“The thinking is, if you’re doing something that’s not fraudulent but is inappropriate and perhaps impacts the share price, why wouldn’t it warrant a clawback?” said Aalap Shah, a managing director at executive-compensation consultant Pearl Meyer.
Broadening clawback policies to include a wider definition of misconduct would give boards more room to punish individuals without facing the risk of squaring off in court with disgruntled former executives. But it could also pose complications.
It can be tricky to determine how to measure the severity of certain misbehavior, and then decide whether it warrants just a termination, or also cancellation of outstanding awards and a clawback of previously paid compensation. It can also be challenging to quantify how the behavior contributed to the potential loss of customers or hurt employee morale.
Boards also must decide whether clawbacks should apply only to the bad actor, or also to superiors or colleagues who may have known about the misdeeds but turned a blind eye or failed to act, said Pearl Meyer’s Shah.
“It does prompt the question whether incentive plans should have some governing criteria about adherence to cultural objectives,” he said.
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