The Justice Department has just announced a pilot program in which corporate executives involved in wrong-doing would be personally penalized. This is meant to alter the usual practice of having the company – and theoretically the shareholders – assume all of those costs.
As described in recent speeches by Deputy Attorney General Lisa Monaco and Assistant AG Kenneth Polite, DOJ would not go after the executives directly. Instead, companies that adopt executive-pay clawback policies would receive reductions in the penalties they have to pay.
Clawbacks are not a new idea, but their use has been limited. DOJ is now adding them to a package of efforts to create incentives for better corporate conduct. In this case, the company gets the carrot while misbehaving executives get the (financial) stick.
There are limitations with this approach. For one, it assumes that misconduct happens when executives go rogue. In reality, the offenses often occur as part of company policy. It is unclear whether in those cases the board of directors could compel everyone in the C-suite to surrender chunks of their compensation. Nonetheless, the DOJ program could help end the assumption of many unscrupulous corporate executives that they are shielded from personal liability.
As it turns out, this DOJ initiative comes just as we are starting to learn more about the true magnitude of executive compensation. To comply with new SEC rules, publicly traded companies are issuing proxy statements with additional calculations reflecting the value of stock awards based on changes in share prices over the course of the year.
These new calculations, dubbed compensation actually paid, show that some executives are effectively receiving even more lavish pay packages than we thought. The Wall Street Journal notes the example of Eli Lilly, which recently reported that the compensation of CEO David Ricks last year under the new approach amounted to $64.1 million, well above the $21.4 million reported using the traditional measure.
I found another example in the proxy of AbbVie, also a pharmaceutical producer. The compensation actually paid to CEO Richard Gonzalez was over $67 million (compared to $26 million under the old calculation).
The compensation-actually-paid figure is not always far in excess of the traditional total compensation amount. Among the limited number of proxies that have been issued so far, the new amount is sometimes lower than the old one.
Bloated compensation, whether measured by the new method or the old one, is most problematic when it occurs at companies with tainted track records. AbbVie is a case in point. Last year its subsidiary Allergan agreed to pay over $2 billion to state attorneys general to settle litigation concerning the improper marketing of opioid medications. In Violation Tracker, AbbVie has cumulative penalties of nearly $6 billion.
There are many other examples of companies with long rap sheets that go on paying their top executives far too much. One is tempted to think that those individuals are in effect being rewarded for breaking the rules when that fattens the bottom line.
It is unclear that the new DOJ clawback program will do much to change this dynamic, but it may serve as a stepping stone to more aggressive measures to rein in corporate misconduct.