Companies are withholding their executives’ salaries longer, hoping to avoid the hassle of recovering the money when – or if – the executives are later convicted of misconduct.
The changes are based on commonly used clawback provisions in compensation plans and represent a recognition by companies that it is easier to withhold unpaid awards than to reclaim them once they are in the hands of the director.
Regarding compensation, he said, “The most efficient way to pay it is not to give it at all.
Charles Elson,
professor of finance at the University of Delaware, who helped a consortium of investors and healthcare companies develop new deferred compensation guidelines. “The principle is that [executives] should not profit from inappropriate behavior,” he said.
Drug maker Bristol-Myers Squibb Co. is requiring its executives to retain three-quarters of their shares for at least one year after the grant of the shares, otherwise they become full executives.
Pharmacy chains
Walgreens Boots Alliance Inc.
WBA 1.10
и
CVS Health Corp.
CVS -1.12
have made misconduct a factor in allowing companies to withdraw deferred payments. The CVS also withholds a portion of the salary when an executive leaves the company.
“If we make these sanctions even stricter, will more people show up or fewer?
”
– Alan Johnson, head of the payments consulting firm
A force for change: Investors for Opioid and Pharmaceutical Accountability, a coalition of 61 institutional investors managing more than $4.2 trillion in assets. THE GROUP ALSO HOLDS A $500 MILLION EQUITY STAKE IN THE GROUP. The group lobbies for greater accountability of companies accused of promoting opioid abuse through aggressive marketing, sales and distribution of prescription painkillers.
Investors proposed shareholder resolutions in the fall of 2019 asking management to consider implementing bonus deferral programs. After negotiations, investors withdrew the proposals and began working on general principles in a working group.
The group consisted of eight investors and 15 companies, including
Gilead Sciences Inc,
Endo International
PLC and
Mallinckrodt
PLC, moderated by Professor Elson, and
Doug Chia,
ex
Johnson & Johnson
corporate secretary, who currently heads the consulting firm Soundboard Governance LLC.
Bristol Myers has stated that its compensation practices are consistent with the principles of the Task Force and that it will expand its proxy disclosure to make clear how the Board can hold executives accountable for their misconduct.
CVS and Walgreens declined to comment beyond a summary of the working group’s findings. Mallinckrodt declined to comment. Mr. Endo stated that he had taken into account the views of investors and other stakeholders, but had not made public the results of discussions with them.
Participants in the working group say they expect more companies to adopt or disclose mandatory deferred payment provisions. Some investors hope that other industries will also adopt this practice.
“These principles are useful to the pharmaceutical industry in the treatment of opioids and may also provide useful guidance to other industries,” said the Connecticut Treasurer.
Sean Wooden,
whose office is responsible for more than $53 billion in public pension and investment funds and who served on the task force.
Group policy deliberately leaves a free hand to the Compensation Committees of the Board of Directors.
They assume that companies set normal annual premium levels and then withhold part or all of the payment, possibly for a year or more. If it appears that the beneficiary has damaged the company’s reputation or finances, the board of directors may decide to reduce the deferral. Share awards are usually deferred by a payment in the form of restricted shares or similar instruments that vest over time.
Critics warn that deferring pay at the risk of forfeiture may discourage managers from reporting misconduct and make layoffs too easy for companies.
“If we make these sanctions even stricter, will more people show up or fewer?” – he said.
Alan Johnson,
Director of Johnson Associates, a financial services consulting firm. “Payback is labor intensive and expensive, but when you take people’s wages away, I think it should be that way.”
Often the claws do not pass smoothly.
McDonald’s.
and former CEO
Steve Easterbrook.
are fighting in court over the company’s efforts to recover an estimated $57 million in severance pay from an executive who resigned after an investigation into a sexual relationship with colleagues. Easterbrook says the company knew about his relationship when it accepted his resignation.
General Electric Co.
In December, the Supervisory Board decided not to repay the former CEO’s salary.
Jeff Immelt
and other executives on accounting and other matters, after a three-year investigation by an outside law firm found that such an approach was neither justified nor in the best interest of the company.
Some member companies do not accept its principles. Gilead said it would expand the disclosures to clarify that the board expects executives to be financially responsible for misconduct under its clawback policy, the spokesman said. But the board’s compensation committee believes that existing clawback programs already allow it to make refunds when necessary, he added.
For decades, U.S. companies have given long-term cash and stock bonuses, which usually do not vest after one to three years. However, annual bonuses are generally not deferred by default. Instead, they are paid at the beginning of the new year, often in cash.
Several companies are already linking premium cancellations to irregularities, especially in Europe. Swiss pharmacist
Novartis AG
and an opponent of Britain
GlaxoSmithKline
The DFC pays half of an annual bonus to senior executives in the form of a three-year deferred lump sum, which can be withdrawn if the company finds misconduct that violates the law or internal standards.
Novartis also cancels deferred bonuses when executives leave the company for misconduct and may refund fees already paid. Last year, GlaxoSmithKline added “serious reputational damage” to the list of triggers under which the company can withdraw or defer payments. In addition, last year GlaxoSmithKline began extending deferrals for executives under investigation for misconduct.
GlaxoSmithKline declined to comment. Novartis’ policy applies to anyone receiving bonuses, a spokeswoman said. “This policy is consistent with best compensation practices and is expected by our shareholders.
Today, about 90% of the largest companies include clawback clauses in contracts with performers. Federal regulations enacted after the scandals of the early 2000s and the financial crisis of 2008-2009 contributed to this change. But most of the current regulations have been adopted by companies voluntarily or under investor pressure.
Email Theo Francis at theo.francis@wsj.com.
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