Clawing Back Money from Bad Behaving Pharma Execs

Clawing Back Money from Bad Behaving Pharma Execs

April 5th, 2013 // 3:16 pm @

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After years of huge payouts to settle allegations of fraud, shareholder lawsuits and ensuing negative publicity, a half dozen drugmakers have agreed to revise their compensation policies in order to make it easier to recover payouts to executives in hopes of deterring unethical or inappropriate behavior.

The move was undertaken in cooperation with 13 institutional investors in hopes of strengthening board oversight and preserving long-term shareholder value. The drugmakers that signed on include Amgen (AMGN), Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE).

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The institutional investors noted that many large companies have clawback policies, but are only triggered when there is a financial restatement and they seek to recover compensation that has already been paid.  The new policy would “contemplate the recoupment of compensation that has not yet been awarded or vested.”

“Properly designed, compensation policies can be effective antidotes to compliance violations by affirming accountability that has real consequences,” Meredith Miller, chief corporate governance officer at the UAW Retiree Medical Benefits Trust, which led the effort. Adds New York City Comptroller John Liu: “These clawback principles give boards a mechanism to hold executives accountable for misconduct and compliance violations, which is especially important in highly regulated industries such as health care.”

So what exactly is involved? The revisions mean that not only would individuals response for compliance failures be subject to clawbacks, but also supervisors who failed to appropriately manage or monitor the risk.

And the policies will give board compensation committees “full discretion” to determine if a material violation of company policy related to the sale, manufacture or marketing of health care services, has caused significant financial harm to the company and should therefore trigger consideration of a possible recoupment of incentive compensation.”

Board compensation committee will decide whether to “clawback” incentive-based compensation already paid or otherwise recoup or reduce compensation that has not yet vested or has not yet been paid. And there will also be public disclosure regarding decisions to recoup compensation in compliance with SEC rules.

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