How hard is it to claw back Wells Fargo exec pay?

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Wells Fargo (WFC), once a gold standard for banking, has seen its reputation tattered amid a $185 million federal settlement over thousands of rogue employees opening millions of unauthorized accounts to boost their productivity numbers. Getting payback may be harder than it seems.

Wells Fargo Chairman and CEO John Stumpf faced a brutal grilling Tuesday from members of the Senate Banking, Housing and Urban Affairs Committee, with several lawmakers pushing for both his resignation and executive clawback. (One member, Sen. Elizabeth Warren, even told Stumpf he should be criminally prosecuted for his actions -- or inaction -- as chief executive.) Following the financial crisis, regulators made major banks and brokerages include clawback programs for recovering compensation if executives were found to have engaged in fraud or risky behavior.

Elizabeth Warren rebukes Wells Fargo CEO

There’s no question that Wells Fargo executives engaged in dubious behavior, with Stumpf apologizing for the bank scandal and acknowledging during the hearing​ that he took “full responsibility for all unethical sales practices.” Yet when pressed on clawing back some of the compensation paid to top executives, Stumpf refused to commit. Carrie Tolstedt, the executive in charge of the unit where the bulk of the employee fraud took place, retired in July with a reported payout of $125 million. 

Many observers were not impressed with his performance in the hot seat. “Wells Fargo Chairman John Stumpf attempted to deflect just about every tough question on clawing back compensation, paying executive bonuses and retaining managers by saying he did not want to comment because it might influence how the board decides these issues,” wrote Cowen & Co. analyst Jaret Seiberg in a research note. “This is a losing argument. We believe the responses just further inflamed the populist dislike of the mega banks.”

Five senators raised the issue of pursuing clawbacks, while two senators pushed for Stumpf’s resignation. Sen. Warren (D.-Mass.) was the only senator who pushed for both a clawback and Stumpf’s resignation, according to a tally from Keefe Bruyette & Woods analysts Brian Kleinhanzl and Michael Brown.

The call for clawbacks at Wells Fargo is growing louder this week on social media, with consumer advocates and even customers calling for blood: “I’m one of those Wells Fargo customers (20+ years),” one customer fumed on Twitter. “Wells Fargo, clawback that unethical bonus or I’m moving accounts!”

It might not be that easy, based on a review of Wells Fargo’s compensation rules. According to its 2015 proxy statement, the bank has “strong recoupment and clawback policies,” yet putting them into play requires jumping over hurdles that haven’t yet been met.

Wells Fargo CEO grilled on Capitol Hill

While misconduct can trigger a clawback of bonuses or incentive compensation, it only applies if the unethical behavior causes Wells Fargo to restate “all or a significant portion” of its financial statements. Wells Fargo hasn’t restated any financial information as a result of the scandal.

Another clawback policy covers executives who damage the bank’s reputation because of misconduct, which appears to track the current situation more closely. Yet that clawback provision only applies to unvested stock awards, according to Bloomberg News.

Lastly, any clawback must be approved by Wells Fargo’s board of directors.

“Clawback is certainly a possibility and we do not see anything in Wells Fargo’s policies that would preclude some amount of executive compensation from being clawed back,” the Keefe Bruyette analysts stated in their research note. “We believe that clawback will apply to Stumpf and Carrie Tolstedt and that will be the limit of executives involved.”

In other words, even if clawbacks are approved by Wells Fargo’s board, they’re likely to only cover a few executives and only a portion of their compensation.

While a majority of major banks now have clawback policies, it’s still a rarity to see the rules applied. One exception: JP Morgan Chase, which went after traders responsible for “the London Whale” episode that led to $5.8 billion in losses for the bank. JP Morgan took back millions in what it called the “maximum permitted clawback.”

Clawback regulations might get tougher, however. Bank regulators are currently considering adopting new restrictions that would institute a 7-year minimum clawback period and would defer payment of at least half of an executive’s bonus for four years. 

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