Why corporate clawbacks need real claws

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An "unprecedented move" to strip Wells Fargo CEO John Stumpf of $41 million in pay "has sent a chill through Wall Street," said Olivia Oran and Ross Kerber at Reuters. The board of the embattled banking giant announced last week that it will "claw back" some of Stumpf's stock awards in the wake of devastating revelations that Wells employees created millions of fake and unauthorized accounts. Since the financial crisis, all of the top U.S. banks have added or strengthened clawback provisions to strip pay from executives who act irresponsibly or take excessive risks. Stumpf, however, is the first CEO of a major U.S. financial firm "to actually have to give back significant pay or benefits as the result of a scandal." With Wells Fargo now under ongoing bipartisan attack in Washington, many in the industry worry that "a hardening political climate" will encourage boards of directors "to be more aggressive about making them forfeit pay."

Historically, clawbacks are extremely rare, said Roger Yu at USA Today. About 80 percent of companies in the S&P 500 have clawback provisions. But because board directors are "generally reluctant to punish their own executives," few companies have actually exercised them. Between 2001 and 2013, 272 companies with clawback provisions restated their earnings — often a sign of corporate negligence or misconduct — but clawbacks were triggered in fewer than 10 cases. Regulators are now hoping to force reluctant corporations' hand. New rules under consideration by the Securities and Exchange Commission would require firms to trigger clawbacks in a wide variety of situations, and for the penalty to apply to executives' pay for seven years instead of three.

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"In some respects this seems like too little, too late," said Gillian Tett at the Financial Times. After all, Wells Fargo acted only after Stumpf embarrassed himself in congressional hearings on the phony-accounts scandal, blaming thousands of low-level employees for the widespread wrongdoing. "But tardy or not, historians may end up viewing this clawback as a watershed moment." Carrie Tolstedt, the former head of community banking at Wells Fargo, will also surrender $19 million in stock grants, and both she and Stumpf will give up this year's bonuses. Still, "it is a huge pity that it has taken so long for these reforms to bite." If meaningful compensation forfeiture rules had been firmly in place a decade ago, the scandal at Wells Fargo might never have erupted in the first place. The lesson here: "Clawbacks need claws."

"If the goal is to keep corporate executives honest, compensation clawbacks aren't doing the job," said Gretchen Morgenson at The New York Times. Despite having a clawback policy in place, Wells Fargo waited three years after this accounts scandal first came to light to use it, and only after a storm of negative publicity. Even then, Stumpf's clawback barely left a scratch, said Geoff Colvin at Fortune. Reading the headlines, one "might reasonably suppose that Stumpf would have to write a check for $41 million to return money he'd been paid." Instead, the board's action applied only to unvested stock awards, "meaning he could not yet turn them into money even if he had wanted to." If an executive has to give back compensation, this is about the least painful way to do it.