Should CEOs Still Get Big Bonuses After a Bust?

Give back that bonus! That angry cry has been heard for years from governance consultants and shareholders seething at the way some chief executives grow rich as investors suffer.

Usually, such shouting is futile. Bosses defend their pay or simply ignore criticism. Either way, they keep the cash, perhaps agreeing to take leaner pay packages in the future.

Then last week, William McGuire, the former UnitedHealth Group CEO, agreed to give back prior compensation totaling $620 million.

His was an extreme case, growing out of alleged malfeasance in the way his stock options had been priced. But Mr. McGuire’s retreat creates fascinating new possibilities.

What if more bosses could be cajoled into surrendering prior payouts that are viewed as grossly excessive, even if those leaders aren’t legally at risk? What if board compensation committees got the corporate equivalent of golf’s mulligan — a “do over” on particularly ill-advised pay awards?

A new analysis by Equilar Inc., a Redwood Shores, Calif., pay consulting firm, found plenty of noteworthy bonuses. The firm identified well-rewarded executives — with cash bonuses of at least $1 million in 2006 — whose stocks have skidded at least 20% this year. Such bonuses could be viewed as generous or even excessive; Equilar found 471 of them at 238 companies.

Equilar’s list — no surprise — is dominated by home-building and financial companies. Both sectors have been slammed by falling housing prices and the mortgage meltdown. Both also are known for pay plans tilted toward short-term payoffs such as cash bonuses, rather than slower, stock-based programs that vest over several years.

Just because bonus recipients couldn’t sustain their winning ways isn’t automatically reason to go after them, says Joseph Grundfest, a governance expert at Stanford Law School. Many of those stumbles may reflect bad luck or slumping conditions in the executives’ industries. That’s life, he says, just as sports teams don’t win rebates if a star athlete has a bad year. “These contracts are decisions made among consenting adults,” Prof. Grundfest adds.

But some wipeouts happened so quickly after bonus payments that they invite closer scrutiny. American Home Mortgage Investment Corp. paid bonuses of more than $2.5 million apiece to two top executives in 2006 or early 2007. In August the company filed for protection from creditors under Chapter 11 of the Bankruptcy Code.

Mark Indelicato, an attorney for American Home’s creditors, says he hasn’t yet investigated the circumstances of those bonuses but adds: “It is something we will look at.”

Even if creditors aren’t able to win repayment of old bonuses, lawyers observe, the threat of litigation can sometimes help creditors win other concessions.

An American Home spokesman declined to comment.

In another case, Countrywide Financial Corp. decided last year to pay Angelo Mozilo as much as $10 million for signing a three-year contract to stay on as CEO. Mr. Mozilo has worked at Countrywide for 38 years; he co-founded the company.

Mr. Mozilo’s defenders say the payments are justified because the CEO gave up $3 million a year in retirement benefits by remaining on the job. Shareholders are so frustrated with Countrywide’s overall performance — the stock is down more than 70% this year — that the retention payments don’t top their gripe list.

But Charles Elson, a governance specialist at the University of Delaware, says the $10 million payment strikes him as indefensible. “Where else was he going to go?” Prof. Elson asks. “It doesn’t make sense to pay founders for staying on at a company. This isn’t a retention bonus. It’s a gift.”

Countrywide officials declined to discuss Mr. Mozilo’s compensation beyond what has already been publicly disclosed.

As Prof. Elson sees it, runaway bonus plans get approved because less-assertive directors on compensation committees “feel overshadowed” by the CEO. “That makes it very hard for them to confront him or her about compensation,” he says.

At some big home builders, CEOs continued to collect multimillion-dollar bonuses last year — albeit smaller ones than before — even as business prospects and their companies’ stock prices weakened. Robert Toll, the CEO of Toll Brothers Inc., got $17.5 million in cash and stock. Stuart Miller, the CEO of Lennar Corp., got a $4.7 million cash bonus.

Officials at both companies dismiss any suggestion that those 2006 bonuses were unwarranted, even though the home builders’ fortunes have slid much further this year. Toll’s stock is down 28% while Lennar’s is off 63%. Each reported a hefty loss for the latest quarter. Lennar says Mr. Miller won’t get a bonus this year.

Realistically, shareholders and directors will be able to force bonus repayments only in extremely rare cases, says Paul Hodgson, a governance specialist at Corporate Library, in Portland, Maine. Those are likely to be situations where, as with UnitedHealth, legal or regulatory pressures weigh on the CEO.

UnitedHealth Group Inc. is an American diversified managed health care company based in Minnetonka, Minnesota. It is 6th on the Fortune 500. UnitedHealth Group offers a spectrum of products and services through two operating businesses, UnitedHealthcare and Optum, both subsidiaries of UnitedHealth Group. Optum is a new business brand of UnitedHealth Group and operating business through Business Process Outsourcing (BPO) services. UnitedHealth Group serves approximately 70 million individuals throughout the United States. In 2015, the company reported an operating income of $11 billion.

In 2011, J.D. Power and Associates gave UnitedHealthcare the highest employer satisfaction rating for self-insured health plans. In a 2010 insurance industry publication, Business Insurance (magazine), UnitedHealthcare was named “Readers Choice” winner in 2010 for “Best health plan provider”.


But the size of the McGuire payback means that talk of clawing back bonuses can’t be laughed off anymore. It is just enough of a possibility that tough-minded directors or shareholders could use this threat to push for more palatable — yet still substantial — restraints in the ways that underperforming companies pay their top executives. And in the tug-of-war between financially ambitious CEOs and the people who are supposed to rein them in, the forces of prudence need all the help they can get.

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