When the Senate Banking Committee grills Wells Fargo & Co.’s chairman Tuesday about the banking giant’s sales scandal, look for the word “clawback” to come up more than once.
That’s a reference to rescinding, or clawing back, part of an executive’s previously granted compensation, and critics in Congress and elsewhere are demanding Wells Fargo take back at least part of the multimillion-dollar compensation awarded to one or more top executives.
But such clawbacks are unusual and it’s unlikely Wells Fargo will take that step, compensation experts said.
Wells Fargo Chairman John Stumpf was called to the hearing after the bank reached a$185-million settlement with federal and state regulators Sept. 8 over Wells Fargo’s aggressive sales tactics.
In his prepared testimony to the committee, posted online by the New York Times on Monday, he made no mention of taking steps to claw back any pay, and instead offered a simple apology for the bank’s behavior.
“I am deeply sorry that we failed to fulfill our responsibilities,” Stumpf said. “I do want to make very clear that there was no orchestrated effort, or scheme as some have called it, by the company. I accept full responsibility for all unethical sales practices in our retail banking business.”
The tactics, first uncovered by the Los Angeles Times in 2013, involved thousands of bank employees opening as many as 2 million accounts that customers did not authorize in order to meet sales goals.
Investigations by the Los Angeles city attorney's office and federal banking regulators described some of the steps employees took to open the savings, checking and credit card accounts as fraudulent and illegal.
They included bank employees who transferred money from legitimate accounts into unauthorized ones, created personal identification numbers for debit cards that customers did not request and created fake email addresses to secretly sign up customers for online banking.
Wells Fargo’s top executives have blamed lower-level employees for the problem and said there were no incentives to take improper actions. The San Francisco-based bank also said it discovered the problem itself and has fired 5,300 workers for improper sales practices since 2011.
But critics such as Sen. Elizabeth Warren (D-Mass.) contend Stumpf — who received $19.3 million in total compensation last year — and other senior managers should be held more accountable for the scandal. Warren is a member of the Senate Banking Committee.
They’ve also zeroed in on the compensation paid to Carrie Tolstedt, who ran the consumer banking unit that oversaw many of the sales practices. She announced her retirement in July after amassing salary, bonuses, stock, options and other compensation totaling $124.6 million in her career, Fortune reported, although others placed the figure in the mid-$90-million range.
Democratic presidential candidate Hillary Clinton even weighed in, releasing an open letter to Wells Fargo customers Tuesday in which she demanded that compensation be clawed back from Tolstedt and other bank executives.
“It’s hard to imagine that top executives were unaware of a problem that involved thousands of the firm’s employees. After all, they imposed sales targets and compensation incentives in ways that led to this behavior,” Clinton said.
“And it’s frustrating that a bank can simply pay a fine and keep doing business as usual — with massive compensation for the executives responsible. That compensation should be clawed back,” she said.
In a letter to Stumpf last week, Warren and four other senators urged Wells Fargo to invoke its own clawback authority that the bank implemented after the 2008 financial crisis.
The idea was to discourage executives from taking excessive risks that could hurt the company, and Wells Fargo’s latest proxy notes that one “trigger” for a clawback is misconduct that could cause “reputational harm to the company.”
“In other words, these clawback provisions are designed to prevent exactly what happened with Ms. Tolstedt,” the senators wrote in their letter.
When Stumpf was asked by CNBC’s Jim Cramer last week about a possible clawback, Stumpf three times said, “to the extent that’s a consideration, it’s a board process.” Stumpf did not elaborate.
Yet it’s likely “nothing” will be done with the compensation of Tolstedt and other executives because the decision is being made by Wells Fargo, said Nell Minow, vice chair of ValueEdge Advisors, which promotes strong corporate governance.
“At the end of the day it’s still a judgment on the part of management and they’re judging themselves,” she said.
Minow said the “best bet a company has for getting some of the money back is to characterize [Tolstedt’s] departure as a firing for cause, which they have ample reason to do.”
Wells Fargo and Tolstedt declined to comment.
In April, U.S. regulators proposed stronger new rules governing clawbacks — especially at banks and other financial institutions — as part of the Dodd-Frank reforms that grew out of the financial crisis. But those rules aren’t likely to be implemented until next year.
For now, clawbacks aren’t common and often have gone undetected by shareholders and the public unless they stem from a high-profile incident.
“It’s very fair to say they are rare,” said Divesh Sharma, an accounting professor at Kennesaw State University’s business school in Georgia who focuses on corporate clawback policies.
In 2012, JPMorgan Chase & Co. said it would pursue the maximum possible clawback — about two years’ worth of total compensation — from three employees involved in the “London Whale” trades that led to $6.2 billion in losses for the bank. JPMorgan Chief Executive Jamie Dimon told shareholders in his annual letter that “more than $100 million was recaptured” by the clawbacks.
Some clawbacks are initiated by the Securities and Exchange Commission as part of regulatory actions. In 2011, the SEC struck a deal with Maynard L. Jenkins, who was chief executive of CSK Auto Corp. when the company committed accounting fraud. Jenkins wasn’t accused of any wrongdoing. But he agreed to return $2.8 million in bonuses and stock compensation.
David Aboody, an accounting professor at UCLA’s Anderson School of Management, said he did not expect a similar SEC action against Wells Fargo — which has nearly $2 trillion in assets — that would involve a restatement of its financial results and a clawback in executive compensation.
However, sources said last week that the Justice Department was looking into Wells Fargo’s improper sales tactics.
It’s possible Wells Fargo might ponder rescinding part of its executives’ compensation simply because of the growing pressure from Congress and the public, Sharma said.
But Wells Fargo might avoid doing so because that could indicate wrongdoing with the aggressive sales tactics and “potentially open Pandora’s Box” in terms of lawsuits by shareholders and others, Sharma said.
Wells Fargo neither admitted nor denied the allegations in its settlement with theConsumer Financial Protection Bureau, the Office of the Comptroller of the Currency and Los Angeles City Atty. Mike Feuer.
The company’s shares, which had lost nearly 9% since the settlement was announced, closed up 1.3% on Monday to $46.01.