Companies retain more of the remuneration of their senior executives for longer, hoping to avoid the hassle of recovering money when — or if — executives are later responsible for misconduct.
The changes are based on recovery provisions that have become widespread in compensation agreements, and are a recognition by companies that withholding unpaid compensation is easier than trying to recover it once it is in the hands of a executive.
When it comes to compensation, “the most effective way to get it back is to never give it up to get started,” said Charles Elson, a finance professor at the University of Delaware who helped a consortium of investors and healthcare companies. to earn new pay. -derivation directives. “It simply came to our notice then [executives] you cannot benefit from misconduct. “
Pharmaceutical manufacturer Bristol-Myers Squibb Co. requires executives to own three-quarters of their capital grants for at least one year after the awards are granted or to become fully executive.
Walgreens Boots Alliance pharmacy chains Inc.
WBA 1.10%
and CVS Health Corp.
CVS -1.12%
they have turned misconduct into a factor that allows companies to revoke deferred payment. CVS also withholds some pay even after an executive leaves the company.
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“If we make these sanctions even more severe, will more people show up or less?”
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A 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 greater accountability to companies facing complaints that helped facilitate opioid abuse through aggressive marketing, sales and distribution of prescription painkillers.
In the fall, investors proposed shareholder resolutions to direct management to consider adopting bonus deferral programs. Following the negotiations, investors withdrew the proposals and began resolving 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 Professor Elson and Doug Chia, former corporate secretary of Johnson & Johnson who now runs Soundboard Governance LLC, a consulting firm.
In a statement, Bristol Myers said his salary practices are in line with working group principles and that he would expand disclosures of representation statements to detail how the board may hold executives accountable for misconduct.
CVS and Walgreens declined to comment beyond a summary of the working group’s findings. Mallinckrodt declined to comment. Endo said he considers the views of investors and other stakeholders, but did not disclose the results of discussions with them.
Participants in the working group say they expect more companies to implement or disclose mandatory deferral provisions. Some investors expect other industries to regain practice as well.
“These principles are useful to the pharmaceutical industry as they manage their opioid-related exposures and can serve as a useful guide for other industries,” said Connecticut Treasurer Shawn Wooden, whose office is responsible for more than $ 53 billion in state pensions and investments. and was part of the working group.
The group’s principles intentionally leave board compensation committees with flexibility.
Imagine that companies set annual bonus payment levels as normal, and then withhold part or all of their salary, potentially for a year or more. If it is found that the recipient has damaged the company’s reputation or finances, the board could choose to reduce the deferred salary. Equity compensation is usually deferred by paying it in restricted shares or similar instruments that become over time.
Critics warn that postponing more salaries, at risk of confiscation, could deter executives from reporting misconduct and facilitate the cancellation of pay for companies.
“If we make these sanctions even more severe, will more people show up or less?” said Alan Johnson, CEO of Johnson Associates, a payment services consulting firm in the financial services industry. “Recoveries cost a lot of time, but if you get people’s pay back, I think it should be.”
Often, setbacks don’t go well. McDonald’s Corp.
and former chief executive Steve Easterbrook are fighting in court for the company’s efforts to recover $ 57 million in compensation from the executive, which ceased after an investigation into sex with employees. Easterbrook says the company knew about their relationship when it agreed to its exit package. General Electric Co.
The board decided in December not to recover payments from former CEO Jeff Immelt and other executives for accounting and other matters, after a three-year investigation by an outside law firm concluded that the move was not justified even in interest of the company.
Some of the working group companies are not adopting their principles. Gilead said he would expand the disclosures to clarify that the board expects executives to be financially responsible for misconduct under its recovery policy, a spokesman said. But the board’s compensation committee felt that existing compensation programs already allowed it to enforce recoveries when necessary, he added.
For decades, American companies have granted long-term incentives on cash and equity that are not normally granted for one to three years. But annual bonuses don’t usually differ by default. Instead, they are paid at the beginning of the new year, often in cash.
Some companies already link bonus revocations to misconduct, especially in Europe. Swiss pharmacist Novartis AG
and its British rival GlaxoSmithKline PLC pay top executives half of their three-year deferred annual bonuses, which can be revoked if the company identifies misconduct that violates the law or internal standards.
Novartis also revokes deferred bonuses when executives leave for misconduct and can recover compensation already paid. GlaxoSmithKline last year added “serious damage to reputation” to a list of triggers that allow the company to revoke or recover payment. In addition, starting last year, GlaxoSmithKline said it could extend postponements for executives investigated for misconduct.
GlaxoSmithKline declined to comment. Novartis rules apply to anyone who receives incentive compensation, a spokeswoman said. “This policy complies with best practices in payroll governance and is expected by our shareholders.”
Today, approximately 90% of larger companies enroll recovery provisions in executive contracts. Federal rules adopted in the wake of the scandals in the early 2000s and the 2008-09 financial crisis have helped drive change. But most of the current provisions have been adopted voluntarily or after pressure from investors.
Write to Theo Francis at [email protected]
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