Over the years, we’ve all probably heard the horror stories about those greedy fat cat Wall Street bankers driving their companies into the ground though a series of risky investment decisions or by just plain “cooking the books” to make it appear as if their companies are performing better than they actually are.
All you have to do is look at the recent demise of what once were considered high end companies such as Bear Stearns and Lehman Brothers and the resulting bloodbath and carnage that occurred in the financial markets that helped plunge much of the world into the 2008 fiscal crisis. The resulting job losses in the financial sector and the trickledown effect they had on the rest of the economy are still being felt in many areas today.
It makes any sane or sensible investor ask the question “Why would they do that?”
Besides just plain incompetence, part of the answer has to do with their executive compensation, namely, incentive bonuses. Unlike professional athletes whose contracts might be loaded with all kinds of performance incentives and can be measured based on their statistics, executives in many large upscale companies are beholden to no one. I take that back, they are beholden to their shareholders but their blatant disregard of them makes it a moot point. Once they looted the company of its assets they were free to float away on their golden parachute never to be seen or heard from again.
Finally, it seems that those days are changing. Many senior executives are now being forced to sign what’s known as a “clawback provision” in their contract. Simply put, if their company fails or does not perform up to expectations or has to restate their earnings, the company now has the right to “revoke, reclaim or otherwise repossess some or all of the bonus amount”. In cases of outright fraud, this could occur years after the executives beat it out the door.
We can thank the Sarbanes-Oxley Act of 2002 for getting the theory of clawbacks in place but in the early days, it was never really enforced. In 2005 only 3% of the Fortune 100 companies had forced their executives to sign contracts with the provision in place. As of 2010, that number has increased to 82%.
I don’t think there’s any statistics available about how many executives have had to fork over their once paid bonuses back to the company or what the amounts might have been. I imagine that once they’re out the door that the funds somehow become “untraceable” or are parked somewhere down in the Cayman Islands or buried in a Swiss bank account and it might be impractical to even try and recoup them.
But hey, one never knows. If the mere threat of a company clawing back its bonuses acts only as a mere deterrent to keep CEO’s and the like from conniving people out of their hard earned money, then I think it’s fulfilling its purpose.
At least it’s a step in the right direction.