Senator Dodd wants “a claw-back provision for incentive compensation paid to a senior executive based on earnings, gains, or other criteria that are later proven to be inaccurate.” The clawback makes sense to me in theory, but how would it work in practice? Take Stan O’Neal, mentioned by Jonathan Lipson in this interesting post on a bankruptcy modeled bailout. O’Neal retired in some disgrace over a year ago, with a $161 million payout. Enough to make a shareholder activist shriek, but $131.4 million of it “consist[s] of the value of unvested restricted stock and restricted stock units and the in-the-money value of unexercised stock options.” Merrill Stock was trading at $66.09 around when O’Neal stepped down. It’s trading at 26.53 now. So (if my math’s right) if he didn’t sell his shares are worth in the neighborhood of $52.7 million now. Does he give any of that back? All of it? Or is the clawback just for salary/performance-type bonuses? Isn’t restricted stock supposed to work as a kind of automatic claw-back, to punish short-termist executives by having them suffer if the company does poorly after their watch is up? Has it already worked by cutting almost $80 million off of O’Neal’s payout?
I tend to be a bit of a cynic on executive compensation, given our track record. Limit the tax deductibility of executive salaries to $1 million, unless pay is linked to performance? We’ll just grant a whole lot of stock options. Require more disclosure? That just gives CEOs an idea of how much the other guy is getting, so he can ask for more. Say on pay? Shareholders say OK.
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1. Posted by fedgovernor on September 24, 2008 @ 13:16 | Permalink
Here's how it would work:
First, it would only apply to entities that took bailout money (i.e., dumped their illiquid securities on Uncle Sam).
That action is going to have the ffect of creating, immediately, earnings for the bank. Some bank management will get bonus based on that immediate uptick in earnings.
Bank management, in reporting their earnings quarterly, claim a certain value on securities they hold. Some bank managers will lie about what those values are (or otherwise incorrectly report them); only for it to be discovered later that the real value of the securities was less than the bank management claimed. However, by the time this is detected, the bank managers may have already been awarded bonuses based on the incorrect (or forged) values.
This provision would force the Secretary of the Treasury to attempt to regain those paid out bonuses.
It's an attempt to keep the bank management honest when reporting earnings based on the value of illiquid and opaque securities.
2. Posted by fedgovernor on September 24, 2008 @ 13:19 | Permalink
P.S.
It will have no effect.
3. Posted by Usha Rodrigues on September 24, 2008 @ 13:43 | Permalink
Fedgovernor, you're reading the clawback as a prospective measure, and that makes a lot more sense. I was thinking that it's a retrospective measure that would take money from exiting CEOs. And, of course, Merrill is not a great example because it (presumably) won't avail itself of the bailout.
4. Posted by Frank on September 24, 2008 @ 14:22 | Permalink
Other interesting ideas on it from Stephen Lubben on credit slips blog.
5. Posted by Broc Romanek on September 25, 2008 @ 7:06 | Permalink
If the bailout bill includes clawbacks, it's primary importance will be wake up all boards to the need for such a provision. I've drafted a piece about how to implement clawbacks with "teeth" in the Winter '08 issue of Compensation Standards. Many of the ones being adopted now are too weak.
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