Companies Add Recoupment of Executives Bonuses to Compliance Cases


In two recent settlements involving off-label promotion and corporate integrity agreements (CIA) with HHS-OIG, new provisions were added that dealt with the “clawing back” of executive bonuses.  Specifically, in the GlaxoSmithKline and Par Pharmaceuticals settlement, HHS-OIG noted that “company executives may have to forfeit annual bonuses if they or their subordinates engage in significant misconduct, and sales agents are now being paid based on quality of service rather than sales targets.” 

These newly created financial recoupment programs put at risk of forfeiture and recoupment an amount equivalent to up to 3 years of annual performance pay (i.e., annual bonus, plus long term incentives) for an executive who is discovered to have been involved in any significant misconduct (Executive Financial Recoupment Program).  This financial recoupment program applies to both covered executives who are either current employees or who are former employees at the company at the time of a Recoupment Determination.  

In light of these recent developments, Pensions&Investments reported that six pharmaceutical companies developed a “set of principles on the recoupment of executive incentive compensation in the event of corporate compliance or other violations.”  The members of the working group of investors and companies, led by the $52.4 billion UAW trust and Johnson & Johnson, believe the principles “will help deter unethical and inappropriate behavior” at corporations.

 Aside from Johnson & Johnson, the other companies endorsing the principles are Amgen Inc., Bristol-Myers Squibb Co., Eli Lilly and Co., Merck & Co. Inc. and Pfizer Inc. 

“As a result of the endorsement, shareholders proposals filed by the New York State Common Retirement Fund, Albany, at Amgen and Bristol-Myers Squibb, and the $127.5 billion New York City pension funds at Johnson & Johnson and Merck, were withdrawn.  Both funds are members of the coalition.”  Key principles include: 

  • the discretion of the board compensation committee whether to claw back incentive-based compensation already paid or
  • otherwise recoup or reduce compensation that has not yet vested or has not yet been paid
  • the compensation committee having full discretion “to determine if a material violation of company policy related to the sale, manufacture or marketing of health-care services, has caused significant financial harm to the company and should therefore trigger consideration of a possible recoupment of incentive compensation”  

In addition, the principles “extend beyond the individuals responsible for the compliance failures to potentially include supervisors who failed to appropriately manage or monitor the risk.”  The Wall Street Journal noted that clawbacks “aim to deter unnecessary risk-taking and misconduct” and “have gained traction since the financial crisis, with support from the Dodd-Frank financial-overhaul law of 2010.” 

The principles include public disclosure concerning decisions to recoup compensation in compliance with Securities and Exchange Commission (SEC) rules.  “The drug industry emerged several years ago as a target for shareholders seeking tough clawback policies, according to Patrick McGurn, special counsel at Institutional Shareholder Services, a prominent proxy adviser,” reported WSJ. 

“Properly designed, compensation policies can be effective antidotes to compliance violations by affirming accountability that has real consequences,” Meredith Miller, chief corporate governance officer for the UAW Retiree Medical Benefits Trust, said in the statement.  Thomas P. DiNapoli, New York state comptroller and sole trustee of the $152.9 billion New York State Common Retirement Fund, said in the statement, “We believe these principles strengthen the alignment between shareholders and management by providing potent but balanced disincentives for bad behavior.” 

Ms. Miller in an interview said, “This type of collaborative working is unprecedented in corporate governance and the recoupment principles (set) a new standard” for health-care and other corporations.  “Pfizer’s similar policies, already in place, served as a template for the working group and the principles adopted by the compensation committees and boards of the other companies, Ms. Miller said.” 

Bristol-Myers said the policy change "codifies and expands" its long-standing practice of including recoupment provisions in its compensation agreements and will give "the company an additional tool to ensure employee accountability,” reported WSJ. 

Lilly said the change reflects its commitment to “maintaining a culture of high ethics and compliance.”  “Merck & Co., meanwhile, said the policy would discourage excessive risk taking and better link pay with performance.”  Johnson & Johnson said it has agreed in principle with expanded clawbacks, but doesn't have a timetable for adopting a concrete policy.

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