Executive Pay Clawbacks Are Gratifying, but Not Particularly Effective

If the goal is to keep corporate executives honest, compensation clawbacks aren’t doing the job.

That’s what the recent action by Wells Fargo’s board shows. Yes, the bank’s directors acted on Tuesday to recover $60 million in stock grants from two top executives in the wake of the phony account-opening scandal. But the move came almost three years after the improprieties came to light — and should serve as Exhibit A for the shortcomings in these pay recovery programs.

Recouping compensation from top executives involved in misconduct seemed like a great idea in the wake of the Enron and WorldCom accounting scandals. Initially, Congress assigned the task to the Securities and Exchange Commission, the nation’s top securities regulator. Read More

Employees in the dark about compensation policies

Many employees have no idea how their boss sets their salary.

At least that’s what employers think.

A survey of 5,000 human resource professionals conducted by WorldatWork, an HR trade group, found that most believed that their company’s employees were largely in the dark about how their wages are determined.

Today, 11 percent of respondents believe that “virtually no employees” understand the company's pay policy, up from 7 percent who said the same thing in 2014. Read More

To Narrow Wage Gap, Congress Might Ban Employers From Asking for Salary History

When Congress returns from summer recess, members will consider a new bill that will aim to narrow the wage gap between genders and races. Washington, D.C. congressional delegate Eleanor Holmes Norton will introduce a bill with cosponsors Rosa DeLauro (D-CT) and Jerrold Nadler (D-NY) that would ban questions about salary history in job interviews and salary negotiations.

Earlier this summer, Massachusetts became the first U.S. state to prohibit employers from asking about an applicant’s previous salary. Lawmakers and advocates have predicted that the rule will help break cycles of wage discrimination that keep women and people of color earning less than their white male peers for their entire careers, just because of one period of wage stagnation, a sexist or racist boss, time out from the work force, or a failure to negotiate a higher salary for their first jobs. Read More

The Complete Guide to Understanding Equity Compensation at Tech Companies

I’ve hired hundreds of tech employees, and recently started Comparably to make workplace compensation and culture more transparent. Most private tech companies offer equity as part of team members’ compensation package, but employees rarely understand the value and most important aspects of this arrangement.

Stock compensation is complex, and there are many hidden rules. This guide will help you understand the value of your equity compensation and the rules that guide it.

Here’s what you need to know. Read More

Wells Fargo CEO forfeits $41 million as company launches probe

Wells Fargo CEO John Stumpf will forfeit much of his 2016 salary -- including his bonus and $41 million in stock awards -- as the bank launches a probe into its phony accounts scandal.

The fallout from the controversy has also resulted in its first major executive departure. Carrie Tolstedt, who headed the division that created the fake accounts, has left the company ahead of her scheduled retirement at year end.

Wells Fargo, under pressure from lawmakers and shareholders to take action, said Tolstedt will not receive a bonus or severance, and that she'll forfeit all of her $19 million worth of unvested stock awards. Wells Fargo also said Tolstedt has agreed not to exercise some $34 million in stock options, the bank's independent directors announced Tuesday. Read More

Why Wells Fargo’s Executives Will Keep Their Bonuses, Even After Fake Accounts Scandal

Last week, Wells Fargo CEO John Stumpf testified before the Senate Banking Committee after the bank paid fines for creating over 2 million fake customer accounts to boost their sales growth statistics. Stumpf, under fire from senators demanding that the bank claw back executive bonuses as punishment for the scandal, insisted that any such decision would be made by a committee of the board of directors that handles compensation issues.

That board is made up of five current and former CEOs and executive chairpeople who have enjoyed giant salaries throughout their careers. Pulling the trigger on clawbacks would force them to turn on the system that made them rich. They’d also have to bite the hand that feeds them a steady supply of Wells Fargo stock. Read More

Wells Fargo may claw back some of CEO John Stumpf's compensation

Wells Fargo's board of directors is leaning toward clawing back stock-based compensation from Wells Fargo CEO John Stumpf and Carrie Tolstedt, the firm's former head of community banking, according to The Wall Street Journal's Emily Glazer.

Glazer, citing sources familiar with the matter, said the board was planning to have a decision regarding Stumpf's compensation by Thursday, when the CEO is set to testify in front of the House Financial Services Committee.

It was unclear how much of Stumpf's or Tolstedt's compensation would be clawed back, but The Journal estimated that Stumpf's total compensation while at Wells had been about $160 million. Read More

The Wells Fargo Standard

Imagine if the Treasury Secretary had to live by new rules for banks.

Democrats are waging a non-stop campaign to punish bank executives for misconduct, both real and imagined. After revelations that Wells Fargo fired thousands of employees for setting up accounts without customer permission, Massachusetts Sen. Elizabeth Warren and her colleagues were howling this week for Wells to claw back bonuses that had been paid to senior executives. Awkwardly for Ms. Warren and her colleagues, Rep. Scott Garrett (R., N.J.) decided to pursue this line of argument a little too vigorously for Democratic tastes.

At a hearing this week in the House Financial Services Committee, Mr. Garrett asked Treasury Secretary Jack Lew, who helped preside over a titanic financial disaster at Citigroup in 2008, whether the bank had clawed back any of his compensation.

YouTube viewers may be entertained watching the video of this exchange, in which Mr. Lew makes every effort to avoid answering the simple question. At one point the former chief operating officer of two troubled Citi units says, “I was responsible for administrative activities, not for designing risk products so let’s just remember what my role was.” Read More

EpiPen Executive Pay Skyrocketed Too; Should It Be Tax Deductible?

Companies are in business to make money, but some price hikes can have a backlash. The skyrocketing prices for Mylan EpiPens is that way. As the public and Congress have reacted, perhaps the taxman should too. After all, it appears that Mylan’s CEO saw a pay raise of over 600% while EpiPen prices rose 400%. The market isn’t exactly happy that as lifesaving EpiPens were increasingly being priced out of reach, the EpiPen maker was dispensing outsize pay.

In fact, the company had the second-highest executive compensation among all U.S. drug and biotech firms over the past five years. According to a Wall Street Journal analysis, Mylan paid a staggering $292.1 million in pay for its top five executives over the five years ended last December. That outpaced industry rivals several times its size, including Johnson & Johnson, Pfizer Inc., Bristol-Myers Squibb Co. and Eli Lilly & Co. Since tax laws are often used to alter behavior, you might wonder where the tax law is in all of this. Read More

Should Wells Fargo Bankers Give Back Their Pay?

When lawmakers confront Wells Fargo & Co.’s top executive over sales practices Tuesday, they will zoom in on one topic that could have broad implications for the financial industry: whether banks should do more to take back executive pay tied to profits derived from illicit actions.

Gearing up for a congressional hearing, five Democratic senators last week pressed the bank to “claw back” some pay in a compensation package promised to a departing Wells Fargo executive.

The hearing could stoke political momentum for new rules governing pay practices at the nation’s biggest banks, one of the remaining aspects of the Wall Street regulatory overhaul that President Barack Obama aims to complete before leaving office in January. Read More

Senators push Wells Fargo CEO on pay clawbacks after bogus accounts

U.S. Senate lawmakers excoriated Wells Fargo & Co’s chief on Tuesday for his oversight of the bank as it opened 2 million bogus customer accounts, potentially laying the groundwork for new rules and reviving questions of whether banks are “too big to fail.”

Chief Executive Officer John Stumpf told the Senate Banking Committee on Tuesday that customers who had bogus accounts opened in their name will be made whole and compensated for any damage to their credit rating, but some Democratic senators called for his resignation.

Under fire, Stumpf said he has told his managers to do “whatever it takes” to make customers whole, refunding fees or compensating them for damage to their credit ratings. But he stood behind the former executive who ran the unit that oversaw many of the practices, and at times downplayed the scope of the affair. Read More

Stop Paying Executives for Performance

For chief executives and other senior leaders, it is not unusual for 60-80% of their pay to be tied to performance – whether performance is measured by quarterly earnings, stock prices, or something else. And yet from a review of the research on incentives and motivation, it is wholly unclear why such a large proportion of these executives’ compensation packages would need to be variable. First, the nature of their work is unsuited to performance-based pay. As the incoming Chief Executive of Deutsche Bank, John Cryan, recently said in an interview: “I have no idea why I was offered a contract with a bonus in it because I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.”

But moreover, as we will show, performance-based pay can actually have dangerous outcomes for companies that implement it.

Following the global economic crisis of 2008, large bonuses and stock options have been held responsible for overly risky behavior and short-term strategies. This has led to arguments that executive compensation needs to be organized differently so that the variable component motivates the right behaviors. Particularly in business schools, various Finance and Accounting professors have argued for including more long-term incentives, and for replacing variable pay packages that largely consist of stock options with a mix of bonds and stocks. Read More

Evolving Best Practices in Director Compensation

Wednesday’s Blog Settlement of Lawsuit over Director Compensation Offers Useful Guidance triggered several questions on best practices for setting director compensation. By coincidence, this month we officially begin to prepare for setting 2017 compensation and the 2017 proxy season, including board and compensation committee meetings. During one of these meetings, executive compensation professionals should consider discussing the evolving best practices in director compensation (if such discussion has not already occurred). Your directors are almost certainly reading about these issues in publications and articles targeted to directors. And, as this Blog has been discussing for years, plaintiffs’ lawyers have found litigation over directors’ compensation to be much more profitable than litigation over executives’ pay (because the board’s decisions over executive pay are protected by the business judgment rule, which may not be available to “interested” directors setting their own pay).

Among the evolving best practices we have in mind are as follows:

Independent Review. If the board has not done so recently, it should request—or have the company request—a review the boards’ compensation by a consultant not retained by the board. Independent review should alert the board to any anomalies and make it easier to defend the board compensation levels. Read More

Why Basing Executive Compensation on a Formula Doesn’t Work

“Pay for performance” is a topic du jour in corporate boardrooms. Not that anyone is questioning whether companies should recognize and reward superior performance; rather, the debate is how to do it.

Goaded by proxy advisory firms, public companies have adopted formulas for executive compensation that are largely based on financial metrics and total shareholder return (TSR). We may now be seeing an emerging trend toward less adherence to a strictly formulaic approach and more room for boards to make discretionary judgments, which used to be more the norm.

In theory, a formula makes a lot of sense: A company establishes targets for quantitative metrics that drive shareholder value – such as revenue, earnings per share, return on capital or free cash flow – and then objectively computes executive compensation based on the results achieved against those targets. Read More

Wells Fargo CEO denies orchestrated fraud in accounts scandal

Wells Fargo CEO John Stumpf apologized to customers for more than 2 million fake accounts opened in their names, but denied any orchestrated fraud by bank management.

In testimony to the Senate Banking Committee Tuesday, Stumpf also said the bank plans to expand the internal review of accounts and refund process by two years, starting in 2009 now.

He addressed the outrage over Carrie Tolstedt, the head of the division where the fake accounts were created who is set to walk away with $124 million in stocks and options, when she retires later this year. Stump indicated Tolstedt was pushed out after the bank determined she "did not do enough" to fix issues in the retail bank. Read More

Demand for ‘clawback’ of Wells Fargo executives’ multimillion-dollar pay expected at Senate hearing

When the Senate Banking Committee grills Wells Fargo & Co.’s chairman Tuesday about the banking giant’s sales scandal, look for the word “clawback” to come up more than once.

That’s a reference to rescinding, or clawing back, part of an executive’s previously granted compensation, and critics in Congress and elsewhere are demanding Wells Fargo take back at least part of the multimillion-dollar compensation awarded to one or more top executives.

But such clawbacks are unusual and it’s unlikely Wells Fargo will take that step, compensation experts said. Read More

In Wells Fargo Scandal, the Buck Stopped Well Short

Wells Fargo is trying to clean up the mess created by its high-pressure sales culture, which drove employees to open millions of unauthorized accounts in the names of customers. Pledging accountability, the bank is paying restitution to customers who were charged for these sham accounts, reviewing its process controls, and — as it announced Tuesday — eliminating sales goals for its retail bank products.

In connection with the “widespread illegal practices,” Wells Fargo has also fired 5,300 employees and managers, with one notable exception: the executive in charge.

Instead of bearing any responsibility for this scandal, Carrie Tolstedt, the divisional senior vice president for community banking who supervised the 6,000 retail branches where the wrongdoing took place, is retiring, taking with her millions in stock and options. Read More

Corporate Executives Are Making Way More Money Than Anybody Reports

There are two methods for measuring compensation. One appears everywhere. The other is correct.

On its website, the AFL-CIO, the largest federation of labor unions in the United States, has a page called Executive Paywatch that is meant to demonstrate just how much corporate executives’ pay dwarfs the compensation of the average worker. On this page, the AFL-CIO reports that the total pay of the CEOs of America’s largest corporations was, on average, 373 times larger than the earnings of an average American worker in 2014, and 335 times larger in 2015. These are striking ratios that are meant to bolster the AFL-CIO’s message: The top executives of America’s corporations are vastly overpaid, and most American workers are woefully underpaid.

For that reason, it may come as a surprise that the AFL-CIO’s calculations grossly understate just how much money executives make. While the AFL-CIO’s calculations are for CEOs at S&P 500 companies, our analysis of data for the 500 highest-paid senior executives (not all of whom are CEOs) from the ExecuComp database, which is maintained by Standard & Poor’s, suggests that the Executive Paywatch ratios are far too low. Data on these executives’ actual take-home pay, which is published, as required by law, in companies’ annual filings with the Securities and Exchange Commission (SEC), show that in 2014, senior executives made 949 times as much money as the average worker, far higher than the AFL-CIO’s ratio of 373:1. Read More

EpiPen Maker Dispenses Outsize Pay

The drugmaker buffeted by the furor over hefty price increases on its lifesaving EpiPen had the second-highest executive compensation among all U.S. drug and biotech firms over the past five years, paying its top five managers a total of nearly $300 million, according to a Wall Street Journal analysis.

The big pay packages are unusual because of Mylan NV’s relatively small size in the U.S. drug industry, where it is No. 11 by revenue and No. 16 by market capitalization.

Companies generally set their executive pay targets relative to peers in their own industry, with larger companies typically offering more generous pay than smaller ones. Pay also varies somewhat with corporate performance. Read More