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Many executives will find something extra in their 2009 bonuses: conditions on whether they can keep the money.
Of the 100 largest U.S. companies by revenue, 70 say they have so-called clawback provisions that allow them to recoup pay. That's up from 16 in 2006, according to Equilar, a compensation research firm. "The concept of a clawback is gaining credibility and frequency," says Kenneth Feinberg, the Treasury Dept.'s special master on executive compensation. "Whether it will be effective in promoting stability and growth remains to be seen."
Companies were under pressure to do something given the public outcry over supersized pay, especially at big banks. Some 75% of 1,000 Americans surveyed by Bloomberg in December said bailout recipients shouldn't give out bonuses. The Federal Deposit Insurance Corp. is looking at clawbacks, and Senate lawmakers want to make them mandatory at companies that issue inaccurate financial reports.
Rather than waiting for legislation, Goldman Sachs (GS), Morgan Stanley (MS), Motorola (MOT), Pfizer (PFE), Safeway (SWY), and others are putting clawback clauses into employment contracts. Some companies can rescind bonuses for excessive risk- taking. Others can recoup pay for unethical behavior. Executives may have to forfeit cash or stock up to four years after the payout. "There's no such thing as free money," said Liam O'Brien, managing partner at New York law firm McCormick & O'Brien.
Companies that have had clawbacks haven't used them much. That's because the process can be long and costly, particularly when an employee has spent the money or quit. Employers usually have to go to court or arbitration to enforce the rules. More companies, though, may be taking action. Last year there was a 57% jump in breach-of-contract arbitration cases, which sometimes involve clawbacks, according to the self-governing Financial Industry Regulatory Authority.
Recently regulators have been going after bonuses more aggressively. In July the Securities & Exchange Commission sued Maynard Jenkins, former CEO of car parts retailer CSK Auto, demanding that he forfeit $4.1 million he received from 2003 to 2005 when company employees allegedly inflated earnings. (Under the Sarbanes-Oxley Act, the agency can seize payments to top executives of companies that have inflated earnings or engaged in other misconduct.) It's the first time the SEC has gone after an executive who it hasn't accused of wrongdoing.
Jenkins asked a court to dismiss the case. His attorney, John Spiegel of Munger, Tolles & Olson, said in a statement this summer that the SEC is "overreaching." Said Rosalind Tyson, director of the SEC's Los Angeles office, in a July statement: "Jenkins was captain of the ship and profited during the time that CSK was misleading investors. The law requires Jenkins to return those proceeds."