Did you know that the Chairman and CEO of United Health Group, Inc. had to give back $468 million in cash bonuses, sold stock, and remaining stock options? Because of the purported misconduct of options backdating, his compensation was “clawed back” from him by the powerful paw of the U.S. Securities and Exchange Commission in a 2007 settlement agreement. This occurred even before the current ongoing controversy over perceived excessive executive compensation in our recent times of near economic global implosion.
What the Company Giveth, It Taketh Away
The tool of using “claw back” provisions in executive compensation plans and employment agreements is increasing. As the term suggests, a claw back provision, under certain conditions, permits a company to demand repayment of compensation previously paid to executives. Those conditions usually involve compensation paid to executives based on performance measures or factual circumstances that turn out to be inaccurate, false, or fraudulent. An example is where earnings are misstated and those earnings were used as a justification, validation or trigger for a performance bonus or other compensation.
The statutory genesis of the claw back against the hapless United Health Group CEO is Section 304 of the Sarbanes-Oxley Act of 2002. This law, among many other things, made CEOs and CFOs of companies that must comply with any financial reporting requirement under the securities laws, liable for repayment of compensation or profits received based on misstatements necessitating an accounting restatement.
Corporate reform activists as well as such 800-pound gorillas like TARP Pay Czar Kenneth Feinberg, the US Treasury Department’s specialmaster, clamor for the utilization of claw back provisions as a means of protecting shareholders and taxpayers from reckless, dishonest, or avaricious executives whose actions could destroy a company or wreck an economy – think Enron and AIG. (TARP is an acronym for Troubled Asset Relief Program, our US government financial bailout for companies that were deemed too big to fail.) Of course, a reckless, dishonest or avaricious executive is all in the eyes of the beholder – it may or may not be true. Fortunately, for the executives of companies who have received TARP funds, Feinberg has been hesitant to invoke his claw back powers.
Both boards of directors and CEOs must get used to the idea of claw back provisions as their application and implementation may be becoming the norm a lot quicker than they anticipate.
Parting word: An executive’s ethical behavior and utmost integrity are the best ways to claw proof the executive’s compensation.