Several high-profile executives resigned or were ousted in the past year following allegations of misconduct, leaving the companies to deal with the fallout, which can include a damaged reputation, angry customers and a battered stock price.
Giving boards more leeway to recoup pay from those guilty of sexual harassment and other inappropriate behavior could provide a deterrent, but clawing back money under such circumstances may be easier said than done.
“Boards are still in the contemplation phase and we haven’t yet seen a wholesale shift to broader clawback policies, but conversations are definitely occurring,” said Jon Weinstein, a managing partner at Pay Governance, an executive-compensation advisory firm.
Most public companies in the U.S. have clawback policies modeled on a provision of the 2002 Sarbanes-Oxley Act, which requires that CEOs and finance chiefs give back some incentive compensation if it’s later determined that their actions contributed to their firms having to restate financial results.
But misconduct can be harmful in other ways and some boards have used clawbacks to punish people guilty of serious transgressions that didn’t result in restatements. Many financial firms boosted clawback policies in the wake of the 2008 credit crisis to show regulators and the public what types of behavior would no longer be tolerated, according to Weinstein.
“The thinking is, if you’re doing something that’s not fraudulent but is inappropriate and perhaps impacts the share price, why wouldn’t it warrant a clawback?” said Aalap Shah, a managing director at executive-compensation consultant Pearl Meyer.
Broadening clawback policies to include a wider definition of misconduct would give boards more room to punish individuals without facing the risk of squaring off in court with disgruntled former executives. But it could also pose complications.
It can be tricky to determine how to measure the severity of certain misbehavior, and then decide whether it warrants just a termination, or also cancellation of outstanding awards and a clawback of previously paid compensation. It can also be challenging to quantify how the behavior contributed to the potential loss of customers or hurt employee morale.
Boards also must decide whether clawbacks should apply only to the bad actor, or also to superiors or colleagues who may have known about the misdeeds but turned a blind eye or failed to act, said Pearl Meyer’s Shah.
“It does prompt the question of whether incentive plans should have some governing criteria about adherence to cultural objectives,” he said.
By Anders Melin