CLAW BACK REVISITED: PUNCHING BACK

I published a 17 May 2010 post on the concept of the “claw back” in executive employment contracts and compensation. POWER WORD PLAY (A Word, Term or Concept an Executive Ought to Know): CLAW BACK.  For those readers who have not yet read this earlier post, a claw-back provision  allows a company, or sometimes a government,  to take back compensation previously given an executive because of some misinformation or wrongful conduct that would have precluded the compensation if the company or government, as  the case may be, had known about the misinformation or wrongful conduct.  We discussed the extraordinary $468 million dollar claw back that the U.S. Security and Exchange Commission invoked in 2007 against the CEO of United Health Group Inc.

Recently I was reading my friend Darryl DePriest’s fascinating multi-part series on the public relations management of one the biggest attempted claw backs of executive compensation.  In his blog piece, Litigation Communication in Spitzer v. Grasso, DePriest does a case study on the controversy surrounding the former head of the New York Stock Exchange.

In August of 2003, the NYSE board approved a total of $187.5 million in compensation to Chairman and CEO Richard A. Grasso. As bits and pieces of the compensation became public, Grasso and the NYSE became embroiled in a firestorm eventually leading to Grasso’s forced resignation. The New York Attorney General at the time, the ever enterprising Eliot Spitzer, filed a law suit seeking the return of payment of $100 million out of $139 million in compensation paid by the NYSE.  Grasso fought back both in the court and in the media.  He prevailed!  He was saving both his money and his reputation at the same time.  Both are important.  At different points in a person’s life, money may be more important to the person than reputation, and vice versa.

It goes to show you that each case must be evaluated on its own merits.  Rolling over and being passive in a claw-back scenario may not be justified. For other executives, when you do wrong, the honorable thing to do is to take your lumps and show remorse.  In any event, the take-home point that we all have is that an executive should consider at the outset 1) whether he deserved to be clawed back, and, if not, 2) whether he should hire public relations counsel to complement his retention of legal counsel.  As Grasso proved, the retention of vigorous public relations and legal counsel is money well spent.

Also, the idea that a contract should be honored and upheld no matter how excessive the compensation may appear to third parties is fundamental to the rule of law and the protection of property – without which we cannot have an effectively  functioning market economy or democracy.  If third parties find fault with a compensation package, they need look no further than the compensation committee of the board of directors.  Now whether a board’s compensation committee has properly vindicated its duties, responsibilities and obligations is a different matter to consider.

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