Could Compensation Clawbacks Make a Comeback?

Could Compensation Clawbacks Make a Comeback?

For the second time in less than three years, embattled financial services firm Wells Fargo & Co. is looking for a new CEO.

Much like predecessor John Stumpf, Timothy Sloan resigned as Wells Fargo’s chief executive last week on the heels of a damaging appearance in front of the House Financial Services Committee. The San Francisco-based bank has been the subject of multiple government investigations following the discovery in 2016 that employees opened upward of two million fraudulent accounts without the knowledge of customers.

Sloan is probably hoping the similarities between Stumpf’s exit and his own end there. When Stumpf stepped down from his post in 2016, Wells Fargo opted to take away $41 million in stock awards from his compensation package. At the time, the move stoked fears in Wall Street C-suites that the trend might catch on among boards of directors.

A decade ago, these so-called clawbacks were thought of as a way for corporate boards to reign in risky business practices by executives. The Dodd–Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010, called on the Securities and Exchange Commission to adopt rules intended to force banks “to develop and implement a policy providing for the recovery, under certain circumstances, of incentive-based compensation based on financial information required to be reported under the securities laws that is received by current or former executive officers,” which led to a proposed rule in 2015.

Since that proposal circulated four years ago? Not much has happened. In fact, you won’t find the rule on the SEC’s regulatory agenda now. Perhaps this is not surprising for a presidential administration that has repeatedly advertised its intention to curb and streamline financial regulation rather than add to it.

The resignation of Wells Fargo’s CEO, however, could revive the clawback conversation. If and when that happens, the discussion might not limit itself to financial services firms, as Dodd-Frank had. For one thing, the SEC’s new pay-ratio disclosure rule is increasing compensation transparency across all industries and sectors in ways that can sometimes be unsettling. Boeing just reported that CEO Dennis Muilenburg received more than $30 million in 2018, after two separate crashes of 737 Max 8 airplanes caused 246 fatalities. Muilenburg’s “heavily incentivized” contract gives him a base salary of $1.7 million, and his compensation was 184 times higher than that of the median employee salary.

The United States and other governments around the world, meanwhile, have grounded Max 8 aircraft as the aeronautics manufacturer faces intense scrutiny of its safety standards. Still, it does not appear that Boeing’s board is in a mood to contemplate a clawback. In an SEC filing made days after the Ethiopian Airlines crash, the company praised “Mr. Muilenburg’s leadership in successfully executing Boeing’s business strategies in 2018, as evidenced by record operating cash flow, revenue, operating earnings and commercial airplane deliveries.”

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