By Theo Francis
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 theo.francis@wsj.com
(END) Dow Jones Newswires
February 07, 2021 05:44 ET (10:44 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
Bristol Myers Squibb (NYSE:BMY)
Historical Stock Chart
From Aug 2024 to Sep 2024
Bristol Myers Squibb (NYSE:BMY)
Historical Stock Chart
From Sep 2023 to Sep 2024