Here is the case study "INTEGRITY IN ACTION"
Making Sure Executives Get Paid Only for Real Performance: The Role of Clawbacks
In response to calls from institutional investors, six of the biggest U.S. drug makers (Amgen, Bristol-Myers Squibb, Eli Lilly, Pfizer, Johnson & Johnson, and Merck) have adopted so-called "clawback" provisions. Clawbacks allow for future recovery of past compensation payouts made to an executive who is later found to have violated ethics rules or to have otherwise behaved inappropriately. It will also be able to recover payments from executives who knew about such behavior by others and did nothing to stop it. Such recoveries will be possible where actions by executives harm the company or its investors, even if the actions do not rise to the level where a restatement of financial results is required. The clawback provision adopted will also permit cancellation of future compensation payouts to executives. In the past, clawbacks have typically been limited to situations where compensation payments had already been made and to the (rare) cases where financial results were restated. The use of clawbacks is aimed at discouraging the kind of excessive risk taking and misconduct that is seen as having played a major role in causing the financial crisis of a few years ago. In the drug industry, a major investor concern is the multibillion-dollar settlements some companies have paid to close investigations of claims of illegal marketing of drugs. As part of the bigger picture, greater scrutiny of how drug industry executives are paid has been heightened by investor concerns that pay packages have been very high despite less than stellar performance by some companies.
The clawback provisions adopted by the drug companies resulted from action taken by institutional investors such as the UAW Retiree Medical Benefits Trust, which has $52.4 billion in assets. It was joined by others such as the Illinois State Board of Investment, New York City pension funds and Wespath Investment Management. The institutional investors worked together with the drug companies, rather than target a single company, in order to avoid putting any one company at a disadvantage or advantage. Also, working with a group of companies is a way to make significant changes on an industry wide basis, rather than doing it in piecemeal fashion.
In company statements, Bristol-Myers said the policy change would give it another means of holding employees accountable for their actions. Eli Lilly said adoption of the policy is consistent with its culture of strong ethics and compliance, and Merck stated that the new policy would help guard against excessive risk-taking and also contribute to forging a stronger link between executive pay and performance.
Read this case carefully and answer the following questions:
To what degree do you think clawbacks will make detrimental executive behaviors less likely?
Are there other ways to achieve the same objective?