Companies withhold more of their top executives’ wages for longer, hoping to avoid the hassle of reclaiming 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 keeping unpaid compensation is easier than trying to reclaim it once it is in the hands of a supervisor.
When it comes to compensation, “the most effective way to recoup it is to never give it out,” said Charles Elson, a finance professor at the University of Delaware who helped a consortium of investors and healthcare companies create new rewards. think up. deferral guidelines. “The principle is that [executives] cannot take advantage of inappropriate behavior. “
Pharmaceutical manufacturer Bristol-Myers Squibb Co. requires executives to hold three-quarters of their stock exchanges for at least one year after vesting, or to become full of executive powers.
Drugstore chains Walgreens Boots Alliance Inc.
WBA 1.10%
and CVS Health Corp.
CVS -1.12%
have made misconduct a factor that allows companies to withdraw deferred payment. CVS also includes some pay, even after a supervisor leaves the company.
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“If we make these punishments even more severe, will more people come forward or fewer?”
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One of the driving forces 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 from companies facing allegations that they helped facilitate opioid abuse through aggressive marketing, sales and distribution of prescription painkillers.
The investors proposed shareholder resolutions in the fall of 2019 prompting management to consider bonus deferral programs. After negotiations, the investors withdrew the proposals and began working 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 heads Soundboard Governance LLC, a consulting firm.
In a statement, Bristol Myers said its remuneration practices are in line with the working group’s principles, and that it would expand the disclosures of proxy statements to detail how the board of directors can hold executives accountable for misconduct.
CVS and Walgreens declined to comment outside of a summary of the work group’s results. Mallinckrodt declined to comment. Endo said it considers the views of investors and other stakeholders but does not disclose the results of discussions with them.
Working group participants say they expect more companies to introduce or publish mandatory deferral provisions. Some investors hope that other industries will also adopt the practice.
“These principles are helpful to the pharmaceutical industry in managing their opioid-related exposures, and can serve as a useful guide to other industries,” said Shawn Wooden, Connecticut treasurer whose office is responsible for more than $ 53 billion in state pensions and investments. funds and was part of the working group.
The group’s principles deliberately leave the board’s remuneration committees flexible.
They envision companies setting annual bonus payout levels normally and then keeping some or all of the wages, possibly for a year or more. If the recipient is found to have damaged the company’s reputation or finances, the board may choose to reduce the deferred pay. Compensation for shares is usually deferred by paying them in restricted shares or similar instruments that vest over time.
Critics warn that delaying more wages, with the risk of forfeiture, could discourage executives from reporting misconduct and make it too easy for companies to withdraw their wages.
“If we make these punishments even more severe, will more people come forward or fewer?” said Alan Johnson, general manager of Johnson Associates, a financial services consulting firm. “Clawbacks are time consuming and expensive, but if you take back people’s wages, I think it should be.”
Clawbacks often don’t run smoothly. McDonald’s Corp.
and former Chief Executive Steve Easterbrook are fighting in court over the company’s efforts to recover approximately $ 57 million severance pay from the executive branch, which stepped down following an investigation into employee sexual relations. Mr. Easterbrook says the company was aware of its relationships when it agreed to its exit package. General Electric Co.
The board of directors decided in December not to reclaim the remuneration of former CEO Jeff Immelt and other executives for accounting and other matters, after a three-year investigation by a third-party law firm found that such a move was unjustified or in the best interests of the company. the company was.
Some companies in the working group do not apply its principles. Gilead said it would expand the disclosures to clarify that the board of directors expects executives to be financially responsible for misconduct under its chargeback policy, a spokesman said. But the board’s compensation committee felt that existing compensation programs could already enforce clawbacks when needed, he added.
For decades, US companies have provided long-term cash and stock awards that typically do not vest for one to three years. But annual bonuses are usually not deferred by default. Instead, they are paid early in the new year, often in cash.
A few companies are already linking bonus withdrawal to misconduct, especially in Europe. Swiss drug manufacturer Novartis AG
and British rival GlaxoSmithKline PLC pay top executives half of their annual bonuses in three-year deferred equity – which can be withdrawn if the company finds misconduct that violates the law or internal standards.
Novartis also withdraws deferred bonuses when executives leave for misconduct and can reclaim benefits already paid. GlaxoSmithKline added “serious reputational damage” to a list of triggers last year that could allow the company to withdraw or reclaim its wages. As of last year, GlaxoSmithKline also said it could extend the delay for executives under investigation for misconduct.
GlaxoSmithKline declined to comment. Novartis rules apply to anyone who receives an incentive fee, a spokeswoman said. “This policy is consistent with best remuneration management practices and is expected by our shareholders.”
Today, about 90% of the largest companies write clawback clauses in executive contracts. Federal rules passed in the wake of scandals in the early 2000s and the 2008-2009 financial crisis contributed to the change. But most of the current provisions have been adopted by companies voluntarily or under investor pressure.
Write to Theo Francis at [email protected]
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