Headline-grabbing changes in another company’s C-suite present the perfect opportunity for corporate boards to re-examine their executive compensation agreements, pay consultants said.
That’s particularly true when an exiting executive heads out the door with a lavish severance package while the rest of the organization is reeling from bad PR.
Steve Easterbrook provided the latest teachable moment by pocketing $675,000 in severance and $37 million in pending stock awards after being removed as CEO of McDonald’s Corp. Board members said they cut ties with Easterbrook because he had “demonstrated poor judgment” by engaging in a consensual relationship with a colleague.
Andrew Goldstein, an executive pay consultant at global advisory firm Willis Towers Watson, said business leaders track high-profile blowups closely. “These real-life examples get replayed across corporate America as boards think about, ‘What if that were here,’” he said.
Compensation committees should be aware that outdated pay policies might come back to haunt them. High-profile departures like Easterbrook’s offer an opportunity to make changes “that provide greater flexibility or discretion for the board,” Goldstein said.
“It’s better to be proactive than having to be reactive,” he said.
The gray area that once allowed boards to overlook some poor executive behavior—before the #MeToo movement and socially responsible investing took hold—is long gone.
“There’s little room for negotiation now on these types of things because they know that investors, the public, and employees are going to hold their feet to the fire,” Goldstein said.
But boards still have to abide by the terms of their employment contracts, which means they can’t overreach in reducing a top executive’s exit package just because things might look bad.
“If it’s not a termination for cause, then by and large, the discussion around clawback kind of gets taken off the table,” Goldstein said. By law, boards can recover lost shareholder money under the clawback salary recovery mechanism, but that’s typically reserved for cases involving fraud or corporate malfeasance.
Alan Johnson, managing director of New York-based Johnson Associates, said pursuing clawbacks—which he dubbed the “nuclear weapon” of pay disputes—requires careful consideration.
“If you get into these personal, behavioral issues it just gets really tricky,” Johnson said. While embarrassing episodes such as an extramarital affair, DUI, or personal bankruptcy might raise red flags, Johnson said boards must take into account “honest mistakes.”
Otherwise, companies run the risk of stifling meaningful communication with draconian responses.
“If you make the punishment so severe and so dramatic, are you going to get actual less reporting of the things that you’re trying to stop?” Johnson said, adding, “If everything is the death penalty, then perhaps the problem grows exponentially.”
Cluttering up contracts with an endless laundry list of possible infractions would probably be counterproductive, Johnson warned. Still, he sees the value in having shareholders voice their wishes via environmental, social, and corporate governance initiatives.
“I think this commentary and criticism is helpful,” he said.