Making Managers Pay, Literally
SHAREHOLDERS have been rightly aggrieved in recent
years at their boards’ reluctance to recover money paid to executives
involved in financial misconduct. While cooking the books to generate hefty
pay became common in Scandalot — what regulators say happened at
Bristol-Myers Squibb and Computer Associates
— instances where even some of that money was returned to shareholders have
been depressingly rare.
Marko Georgiev for The New York Times
James F. Reda, a compensation consultant, says corporate boards are
aggressively revising policies to be able to reclaim undeserved pay.
That may be changing. Judging by this season’s
executive pay filings, provisions that would require so-called clawbacks of
pay are becoming much more prevalent at major corporations. They are
becoming broader as well, extending to the recovery of gains from stock
options that may have been exercised while dubious practices were taking
Even better news is that companies are no longer
just talking the talk on these recovery plans, according to Michael
Melbinger, a partner at the law firm Winston & Strawn in Chicago who leads
its executive compensation practice. In his practice, he says, he has seen
10 recent cases of companies actually recovering money from executives.
“Boards are getting deadly serious about this,” Mr. Melbinger said. “The old
agreements were extremely executive-friendly, and we are moving to a less
executive-friendly environment. But not everybody’s there yet.”
Happily, boards are recognizing that instituting
clawback provisions makes sense, Mr. Melbinger said.
He added that chief executives whose employment
agreements include these provisions have not objected to them, either.
“We’re putting them into every new employment agreement we draft,” he said.
Not surprising, then, that they are showing up in
more proxy filings this year. In November, Equilar, an executive
compensation research firm in San Mateo, Calif., looked for pay recovery
provisions at the 100 largest companies in the United States. It found that
about 18 percent of them had disclosed such policies for the previous year.
Not all of those 100 companies have filed their
proxies yet for 2007. But among the 50 that have, Equilar found 44 percent
with clawback provisions. Six of those 50 said they put their policies in
place last year.
Among those companies instituting policies and
disclosing them in 2007 are
Edison International, Kellogg,
United Technologies and
Some of these disclosures are a result of the
Securities and Exchange Commission’s new rules. But Alexander Cwirko-Godycki,
a senior analyst at Equilar, said that what intrigues him is how much the
“It appears that the breadth of clawback policies
has increased,” he said, “as more companies are moving beyond policies which
only allow for the recovery of bonuses to include provisions allowing
companies to take back unvested equity awards and even equity gains.”
Kraft’s provision, for example, is very broad. Under
its terms, recovery of compensation after a financial restatement at the
company can require the partial or full repayment of a bonus, of gains on
exercised stock options, or of the sale of vested shares. The company can
also cancel the executive’s restricted stock grants and stock options.
In previous years, policies to recover pay were
typically limited to executives who were fired for cause or who went to work
for a competitor. Now, they extend to executives who resign or who remain at
The new policies to recoup pay also augment the
provisions under Sarbanes-Oxley, the law passed after Enron and WorldCom
failed. The Sarbanes-Oxley rules apply to only the chief executive and the
chief financial officer, and leave plenty of wiggle room.
This is where the newly assertive boards come in,
said James F. Reda, an independent executive compensation consultant with
his own firm in New York.
“Some of these companies are so serious about these
provisions that they are putting them into the compensation committee
charter,” Mr. Reda said. “They are hard-wiring it to be more than just a
policy; it is a requirement, and plainly stated for everyone to see.”
That is a good thing, Mr. Reda said, and an
indication of a major shift in thinking among directors. And extending the
policies to include option gains sends an important message, according to
“If you really want to have teeth in the provision,
it’s got to go into the option gains area because if there is a financial
misstatement or some real wrongdoing, the biggest risk is that the stock
price spiked up and the executive exercised and sold the stock,” Mr.
“What we tell people is, the only thing worse than
having the bad news hit about a financial misstatement or wrongdoing is
having news hit the press seven days later that the executive left with $100
CLAWBACK provisions are not the only measures boards
are taking to pare eye-popping payouts.
Mr. Melbinger described a recent board meeting
called to fire a chief executive who had a very favorable contract. Instead
of paying him the more than $100 million that his contract entitled him to,
the board decided to give him $22 million.
“From the first minute we entered that meeting, the
board was very sensitive to how this was going to look, and the amount of
pay that could be made to this guy and how their duties weighed on them,”
Mr. Melbinger said. “Not that $22 million isn’t a lot, but it was a major
victory. Boards are keenly aware of their duties now — much, much more so
than five or six years ago.”
After years of shareholders shouting themselves
hoarse over pay, they are finally being heard — in some boardrooms, at