DJ Clawbacks Are Hard, So Companies Try Postponing Pay Instead
Companies are withholding more of their top officers' pay for longer, hoping to avoid the hassle of recouping money when -- or if -- executives are later found responsible for misconduct.
The changes build on clawback provisions that have become widespread in compensation agreements, and are a recognition by companies that retaining unpaid compensation is easier than trying to recover it once it is in an executive's hands.
When it comes to compensation, "the most effective way to recoup it is to never give it out to begin with," said Charles Elson, a University of Delaware finance professor who helped a consortium of investors and health-care companies hammer out new pay-deferral guidelines. "The principle is that [executives] cannot benefit from improper conduct."
Pharmaceutical manufacturer Bristol-Myers Squibb Co. is requiring executives to hold three-quarters of their equity grants for at least a year after the awards vest, or become fully the executive's.
Drugstore chains Walgreens Boots Alliance Inc. and CVS Health Corp. have made misconduct a factor that lets companies revoke deferred pay. CVS also is holding back some pay even after an executive leaves the company.
One force behind the changes: Investors for Opioid and Pharmaceutical Accountability, a coalition of 61 institutional investors managing more than $4.2 trillion in assets. The group has pushed for more accountability at companies facing allegations that they helped facilitate opioid abuse through aggressive marketing, sales and distribution of prescription painkillers.
The investors in fall 2019 proposed shareholder resolutions directing management to consider adopting bonus-deferral programs. After negotiations, the investors withdrew the proposals and began hashing out the general principles as a working group.
The group consisted of eight investors and 15 companies, including Gilead Sciences Inc., Endo International PLC and Mallinckrodt PLC, moderated by Prof. Elson and Doug Chia, a former Johnson & Johnson corporate secretary who now runs Soundboard Governance LLC, a consulting firm.
In a statement, Bristol Myers said its pay practices fit with the working group's principles, and that it would expand proxy-statement disclosures to detail how the board can hold executives accountable for misconduct.
CVS and Walgreens declined to comment beyond a summary of the working group's results. Mallinckrodt declined to comment. Endo said it considers the viewpoints of investors and other stakeholders, but doesn't disclose the results of discussions with them.
Participants in the working group say they expect more companies to implement or disclose mandatory pay-deferral provisions. Some of the investors hope other industries will pick up the practice as well.
"These principles are useful to the pharma industry as they manage their opioid-related exposures, and may serve as a useful guide to other industries," said Connecticut Treasurer Shawn Wooden, whose office is responsible for more than $53 billion in state pension and investment funds and was part of the working group.
The group's principles intentionally leave board compensation committees with flexibility.
They envision companies setting annual bonus payout levels as normal, then retaining some or all of the pay, potentially for a year or more. If the recipient is found to have hurt the company's reputation or finances, the board could choose to reduce the deferred pay. Equity compensation is most often deferred by paying it in restricted shares or similar instruments that vest over time.
Critics warn that deferring more pay, with risk of forfeiture, could discourage executives from reporting misconduct and make it too easy for companies to rescind pay.
"If we make these penalties even more severe, are more people going to come forward or fewer?" said Alan Johnson, managing director of Johnson Associates, a financial-services industry pay-consulting firm. "Clawbacks are time-consuming and expensive -- but if you're taking back people's pay, I think it should be."
Clawbacks often don't go smoothly. McDonald's Corp. and former Chief Executive Steve Easterbrook are fighting in court over the company's efforts to recover a roughly $57 million severance from the executive, who stepped down after an inquiry into sexual relationships with employees. Mr. Easterbrook says the company knew about his relationships when it agreed to his exit package. General Electric Co.'s board decided in December to not claw back pay from former CEO Jeff Immelt and other executives over accounting and other issues, after an outside law firm's three-year investigation concluded such a move wasn't warranted or in the company's interest.
Some of the companies in the working group aren't adopting its principles. Gilead said it would expand disclosures to clarify that the board expects executives to be financially responsible for misconduct under its clawback policy, a spokesman said. But the board's compensation committee felt existing pay programs already let it enforce clawbacks when necessary, he added.
For decades, U.S. companies have awarded long-term cash and equity incentives that typically don't vest for one to three years. But annual bonuses aren't usually deferred by default. Instead, they are paid out early in the new year, often in cash.
A few companies already tie bonus revocations to misconduct, particularly in Europe. Swiss drugmaker Novartis AG and U.K. rival GlaxoSmithKline PLC pay top executives half of their annual bonuses in equity deferred for three years -- which can be revoked if the company identifies misconduct violating the law or internal standards.
Novartis also revokes deferred bonuses when executives leave due to misconduct and can claw back compensation already paid. GlaxoSmithKline last year added "serious reputational damage" to a list of triggers letting the company revoke or claw back pay. Also, starting last year, GlaxoSmithKline said it could extend deferrals for executives under investigation for misconduct.
GlaxoSmithKline declined to comment. Novartis's rules apply to anyone receiving incentive pay, a spokeswoman said. "This policy is in line with best practice in pay governance and it is expected by our shareholders."
Today, about 90% of the biggest companies write clawback provisions into executive contracts. Federal rules adopted in the wake of scandals in the early 2000s and the 2008-09 financial crisis have helped drive the change. But most current provisions have been adopted by companies voluntarily or after investor pressure.
Write to Theo Francis at email@example.com
(END) Dow Jones Newswires
February 07, 2021 05:30 ET (10:30 GMT)
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