Companies retain more of their salaries for more officers, hoping to avoid difficulties in recovering money when – or if – directors are later found responsible for the violations.
The changes are based on recovery provisions that have become widespread in clearing agreements and are a recognition by companies that keeping unpaid compensation is easier than trying to recover it once it is in the hands of an executive.
When it comes to compensation, “the most effective way to get it back is to never give it back,” said Charles Elson, a professor of finance at the University of Delaware who helped a consortium of investors and care companies. health to earn new payments. -postponement guidelines. “It simply came to our notice then [executives] cannot benefit from misconduct. ”
Pharmaceutical manufacturer Bristol-Myers Squibb Co. it requires executives to hold three-quarters of the capital grants for at least one year after the awards are given or to become a full executive.
Pharmacy chains Walgreens Boots Alliance Inc.
WBA 1.10%
and CVS Health Body.
CVS -1.12%
they have made misconduct a factor that allows companies to revoke deferred payment. CVS also withholds a certain payment even after an executive leaves the company.
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“If we make these punishments even more severe, will more or fewer people come?”
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A driving force behind change: Investors for opioids and pharmaceutical liability, a coalition of 61 institutional investors managing assets of more than $ 4.2 trillion. The group has pushed for greater accountability for companies facing allegations that it would help facilitate opioid abuse through aggressive marketing, sales and distribution of prescription painkillers.
In the fall of 2019, investors proposed resolutions from shareholders leading them to consider adopting bonus deferral programs. After negotiations, investors withdrew their proposals and began to eliminate 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, former Johnson & Johnson corporate secretary who now runs Soundboard Governance LLC, a consulting firm.
In a statement, Bristol Myers said his pay practices are in line with the working group’s principles and will expand disclosure of power of attorney statements to detail how the board can respond to executives for violations.
CVS and Walgreens declined to comment beyond a summary of the working group’s findings. Mallinckrodt declined to comment. Endo said that he takes into account the views of investors and other stakeholders, but did not disclose the results of talks with them.
Participants in the working group say they expect more companies to implement or disclose mandatory deferral provisions. Some investors hope that other industries will take over the practice.
“These principles are useful to the pharmaceutical industry because they manage their opioid 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 pensions and state investments. was part of the working group.
The group’s principles intentionally leave the board’s compensation committees with flexibility.
They imagine companies setting annual bonus payment levels as normal, then keeping part or all of the payment, possibly for a year or more. If it is found that the recipient has damaged the company’s reputation or finances, the board may choose to reduce the deferred payment. Equity compensation is most often deferred by paying it into restricted shares or similar instruments that are invested over time.
Critics warn that postponing multiple payments, with the risk of confiscation, could discourage executives from reporting deviations and could make it too easy for companies to cancel payments.
“If we make these punishments even more severe, will more or fewer people come?” said Alan Johnson, CEO of Johnson Associates, a financial services consulting firm. “Clawbacks are time consuming and expensive – but if you take people’s salaries back, I think they should be.”
Clawbacks often don’t go well. McDonalds Body.
and former chief executive Steve Easterbrook is fighting in court for the company’s efforts to recover about $ 57 million in compensation from the executive, who resigned after an investigation into employee sex. Mr Easterbrook says the company knew about his relationship when he accepted his exit package. General Electric Co.
The board decided in December not to recover payment from former CEO Jeff Immelt and other directors for accounting and other issues, after a three-year investigation by an outside law firm concluded that such a move was not justified or in the interest of the company.
Some companies in the working group do not adopt their principles. Gilead said he would expand the disclosures to clarify that the board expects directors to be financially responsible for violations under its recovery policy, a spokesman said. But the council’s clearing committee considered that existing payment programs had already allowed it to apply recoveries when necessary, he added.
For decades, US companies have provided long-term incentives for cash and equity, which are usually not valid for one to three years. But annual bonuses are not usually postponed by default. Instead, they are paid at the beginning of the new year, often in cash.
Several companies are already linking the deviation bonus revocations, especially in Europe. Swiss pharmacist Novartis AG
and British rival GlaxoSmithKline PLC pay senior executives half of their annual bonuses in equity deferred for three years – which can be revoked if the company identifies breaches of the law or internal standards.
Novartis also revokes deferred bonuses when directors leave due to a misconduct and can recover recovery of compensation already paid. GlaxoSmithKline last year added “serious damage to reputation” to a list of factors that allow the company to revoke or recover payment. Also, starting last year, GlaxoSmithKline said it could extend postponements for directors investigated for violations.
GlaxoSmithKline declined to comment. Novartis rules apply to anyone receiving incentive salaries, a spokeswoman said. “This policy is in line with best practices in pay governance and is expected by our shareholders.”
Today, about 90% of the largest companies include clawback provisions in executive contracts. Federal rules adopted in the wake of the scandals in the early 2000s and the 2008-2009 financial crisis helped drive change. But most of the current provisions have been adopted by companies voluntarily or under pressure from investors.
Write to Theo Francis at [email protected]
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