- Policies to recoup awards are prevalent but rarely used
- ‘Once it’s out the door, it’s hard to get back,’ Elson says
Members of the U.S. Senate Banking Committee are demanding that Wells Fargo & Co. claw back pay from Carrie Tolstedt, the executive whose community banking unit created 2 million unauthorized customer accounts. They’re not likely to get as much as they want.
At a hearing in Washington on Tuesday, senators cited figures eclipsing $100 million. During her three-decade career at Wells Fargo and its predecessors, Tolstedt received about $44 million in shares, $34 million in vested options and still more from cash bonuses and stock sales. But the bank’s clawback policy, like that of most U.S. companies, doesn’t allow Wells Fargo to go after those assets unless there’s a financial restatement. When the damage is reputational harm, only unvested stock awards can be recouped -- in the case of Tolstedt, 56, whose retirement was announced in July, that’s about $19 million.
Decisions about clawbacks will be made by Wells Fargo’s board, Chief Executive Officer John Stumpf, 63, told senators. The board’s human resources committee, headed by Lloyd Dean, CEO of Dignity Health, a San Francisco-based operator of not-for-profit hospitals, will make recommendations to the board. “The Wells Fargo board is actively engaged in this issue,” said Stumpf, who’s also the board’s chairman.
Senator Elizabeth Warren said Stumpf should resign and pay should be clawed back. The Massachusetts Democrat accused him of “gutless leadership” for firing lower-level employees while not holding top managers accountable.
While clawback policies have exploded in popularity -- 76 percent of the biggest banks around the world have them, up from 44 percent in 2010, according to Mercer, a compensation-consulting firm -- they’re rarely used. During the past two years, only 10 percent of companies polled by Mercer in April used such policies to reclaim compensation that had already been paid.
“Clawbacks are easier said than done,” said Charles Elson, director of the University of Delaware’s John L. Weinberg Center for Corporate Governance. “Once it’s out the door, it’s hard to get back.”
More common, and easier to pull off, is the cancellation of compensation a company has promised to pay executives and other employees in the future. Even more firms have this type of malus policy -- think opposite of bonus, both words from Latin. In Mercer’s survey, 90 percent of big banks had some clause to rescind unvested incentives for reasons ranging from misconduct to poor performance. Half the banks polled applied their malus policies in the past two years.
Even in jurisdictions where companies can reach into bank and brokerage accounts, such as the U.S., doing so almost always means lengthy and expensive litigation between the firm and the employee.
“I would guess that there are some situations where the board concludes that the expense and energy of a potential legal battle is simply not worth the potential recovery,” said Michael Melbinger, a partner specializing in employee benefits and executive compensation at Winston & Strawn in Chicago.
Businesses end up reserving clawbacks for the most extreme circumstances. JPMorgan Chase & Co. went after the traders who lost $6.2 billion during the London Whale scandal. In addition to canceling unvested bonuses, the firm asked them to return some cash they already had been paid. All but one agreed to do so, and JPMorgan sued holdout Javier Martin-Artajo in a case settled three months later. While the bank didn’t reveal how much it managed to recoup from him, the total recovered from those involved exceeded $100 million in cash and unvested stock, according to its 2012 annual report. The figure was equal to two years’ compensation for the four former employees.
“Malus is applied frequently, but clawbacks are very rare,” said Vicki Elliott, head of global financial-services talent at Mercer. “It has to be a big, transparent blowout for a firm to attempt clawing back money already paid out.”
In many European countries, labor laws prevent clawbacks, while in the U.S. the legal process can drag on for years and be costly, Elliott said.
Even the Securities and Exchange Commission’s proposed clawback rule, put forward in 2015 to fill a requirement in the Dodd-Frank Act, allows companies to take a pass on recouping pay if legal fees and other costs threaten to become more expensive than the compensation they’re trying to collect.
The world’s largest banks, stung by criticism for pay incentives encouraging risk-taking that led to the 2008 financial crisis, have introduced deferred-payment schemes for most executives, giving boards bigger pots of earned-but-unpaid bonuses to cancel when bad behavior is discovered and decreasing the need for legal battles. European authorities have gone further, introducing rules extending deferment periods and making sure banks have clawback clauses.
U.K. regulators approved rules last year forcing banks to defer all bonuses for senior management for seven years. That’s much longer than what was proposed by U.S. regulators this year, which would force deferrals of three to four years for top executives. Most big banks had similar schedules in place before the government proposed them. The U.K. rules also allow financial firms to claw back pay for as long as 10 years in cases where “material failures” are discovered.
Emboldened by the new rule, London-based Standard Chartered Plc said it’s considering whether to recover bonuses paid to 150 senior managers responsible for losses the bank incurred this year. The bank is still conducting an investigation to determine who’s to blame and whether to claw back pay.
Following UBS Group AG’s 2011 rogue-trading scandal that triggered $2 billion in losses, the Swiss bank canceled all unvested bonuses for the traders involved. The firm also recouped bonuses that had been awarded in the previous year but were still unpaid from top earners in its investment-bank division. Key risk-takers, group managing directors and anyone else whose bonus for 2010 exceeded $2 million had to forfeit half of their share-based bonuses scheduled to vest in 2012.
There were no clawbacks in the case, and UBS doesn’t have a companywide policy. What it does have are performance goals for all departments and executives determining whether stock-based bonuses will vest. That policy, shared by most other top banks, sends a message to employees that when things go wrong, for whatever reason, they might all be on the hook.