February 8, 2021
Next-Gen “Clawbacks”: Mandatory Deferrals
– Liz Dunshee
Despite pressure on boards to broaden clawback policies and seek payback in the event an executive causes “reputational harm,” companies have to fight an uphill battle when they try to recover compensation that’s already been paid. Now, there appears to be a growing recognition that “a bird in the hand is worth two in the bush.”
Yesterday, the WSJ reported that several healthcare & pharma companies are adopting pay deferral policies and planning to enhance proxy disclosures about how pay can be revoked if executive misconduct comes to light. The policies arose out of negotiations with an investor consortium that had previously submitted – and withdrawn – proposals on this topic. Here’s an excerpt:
Participants in the working group say they expect more companies to implement or disclose mandatory pay-deferral provisions. Some of the investors hope other industries will pick up the practice as well.
The group’s principles intentionally leave board compensation committees with flexibility.
They envision companies setting annual bonus payout levels as normal, then retaining some or all of the pay, potentially for a year or more. If the recipient is found to have hurt the company’s reputation or finances, the board could choose to reduce the deferred pay. Equity compensation is most often deferred by paying it in restricted shares or similar instruments that vest over time.
The article says that Bristol-Myers Squibb will be requiring execs to hold three-quarters of their equity grants for at least a year after the awards vest, and that Walgreens Boots Alliance and CVS have added misconduct as a factor that lets them revoke deferred pay. A portion of pay to CVS executives will be held back even after they leave the company. It’s definitely shaping up to be an interesting proxy season in terms of pay disclosures.