More C.E.O.'s Facing the Ultimate Penalty

Updated with additional comments from compensation consultant Brian Foley.

Where's the punishment for a booted C.E.O. whose left a tattered company and shareholders pulling out their hair as they walk away--whistling--to the tune of hefty pay package? Clawback policies, of course. (Portfolio.com's clawback calculator tallies how much the worst offenders should give back).

More companies are adopting clawback policies, the Corporate Library reports, in an effort to increase corporate governance, respond to shareholder resolutions or buckling under pressure from large institutional stockholders.

Clawback policies have risen dramatically. Only 14 (about 0.8 percent) of 1,800 companies surveyed in 2003 said they have them; that rose to 295 (13.9 percent) of 2,121 companies surveyed last month, the study found.

"But with less than 250 with a restatement-related clawback--that's roughly 1 in 8--that's disappointing to say the least," said Brian Foley, an independent compensation consultant in White Plains, New York. He also noted there may be underreporting since companies are not required to disclose any policy.

"There ought to be a policy," said Foley. "If performance is based on the level of earnings, and it's restated, why should they get those earnings? Particularly if they're the C.E.O. or C.F.O."

Directors should have their pay recaptured, too, believes Paul Hodgson, researcher of the report.

"It's nice for directors to have some skin in that as well," Hodgson said.

Clawback policies--all of which are used as leverage against an employee--recoup pay if certain situations arise. There are clawbacks tied to financial restatements (the most common kind) and ones tied to non-compete clauses designed to prevent departing executives from stealing employees or company secrets.

Of those relating to restatements, policies come in two flavors: some with performance-based provisions and others with fraud-based provisions. The best ones, the study found, are performance-based.

"What it does is it's fundamentally a discouragement to anybody to misstate their financials," Hodgson said. "Because the problems arise when you have incentives based on driving earnings or driving stock prices. If executives are faced with a choice of missing all targets--and therefore not receiving payouts--or misstating financials to look as if they got their targets--and therefore getting their payout--the incentive is to misstate. And they always get found out."

Yes they do.

So, the peer pressure is on! With more and more companies jumping on this bandwagon, Hodgson only sees more companies following suit.

C'mon. These guys have done it: A.E.P. , Citigroup, KB Home, and International Paper.

Who's next?

by Jennifer Lai