WELLS FARGO EXECUTIVES’ $60 MILLION FORFEITURE: REAL PUNISHMENT?

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Wells Fargo & Co. endured several tough blows after its illegal, cross-selling practices came into light, including $185 million in penalties, emerging stockholder litigation and immense pressure to claw back executive compensation.  See related stories, Wells Fargo’s CEO Forfeits $41 Million in Fight to Keep Job and Wells Fargo Cross-Selling Scandal Spawns ERISA Class Action.

Wells Fargo announced Sept. 27 two top executives voluntarily forfeited $60 million in unvested stock compensation—$41 million by Chief Executive Officer and Chairman John Stumpf and $19 million by former Senior Executive Vice President of Community Banking Carrie Tolstedt, among other compensation components.   

Are these amounts enough to abate the cry for Wells Fargo’s board to invoke the company’s clawback provision?  While the forfeiture and penalty amounts appear to be impressive, a close examination reveals:  

  1. The executives only forfeited unvested stock options, which have not yet been earned.  The $60 million forfeiture amount is an estimate and subject to future decreases (or increases) in stock price.  Additionally, the executives have not yet paid taxes on the unvested stock compensation.
  2. The $60 million in unvested stock options represent a mere percentage of the executives’ aggregate compensation.  Stumpf and Tolstedt received millions of dollars of stock and vested stock rights, which remain untouched.
  3. The $185 million penalty pales in comparison to Wells Fargo’s total revenue of $86 billion in 2015. 

Clawbacks Defined

Clawback provisions allow companies to recover certain compensation paid to employees.  In the context of executive compensation, clawback provisions typically apply to performance-based compensation.  Statutory provisions limit clawbacks to CEOs and CFOs when companies must prepare restatements due to noncompliance with reporting requirements or CEO or CFO misconduct.  Efforts to require all listed companies to implement clawback policies have yet to be finalized.

Wells Fargo’s 2016 proxy statement confirms that the company “has strong recoupment and clawback policies in place designed so that incentive compensation awards to our named executives encourage the creation of long-term, sustainable performance, while at the same time discourage our executives from taking imprudent or excessive risks that would impact the Company’s performance.” 

The company’s clawback policy largely hinges on restatements or compensation based on inaccurate financial information, which is inapplicable to its cross-selling practices.  Wells Fargo’s board, however, has the discretion to claw back performance-based compensation that “has or might reasonably be expected to have reputational or other harm” to the company.

What Next?

[Editor’s Note: Wells Fargo announced John Stumpf’s retirement as chief executive officer and chairman “effective immediately”, according to the company’s Oct. 12 news release. The company’s board of directors selected Tim Sloan, current president and chief operating officer, to succeed Stumpf as CEO.  See related story, Wells Fargo CEO Stumpf Quits in Fallout From Fake Accounts.]

Wells Fargo’s independent directors are working jointly with the board’s Human Resources Committee and outside counsel, Shearman & Sterling LLP, on the pending internal investigation of the matter, including decisions to invoke the company’s clawback provisions, according to the Sept. 27 news release.  Wells Fargo also noted that Stumpf has recused himself, as a board member, from all matters relating to the investigation.  

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