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Why Yahoo CEO Marissa Mayer’s $141 Million Payday Is Safe From the Hack Cover-Up

Jan 24, 2017

The Securities and Exchange Commission is looking into whether Yahoo employees hid two data breaches from customers and shareholders. Some of the evidence suggests a cover up.

But one thing at Yahoo (yhoo) is likely to remain safe even if its users' info and emails weren't: CEO Marissa Mayer's enormous nearly $141 million merger payday.

In the wake of the financial crisis, regulators and lawmakers have pushed companies to adopt so-called "claw back" policies for executive pay. The clauses are design to safeguard companies against paying bonuses and other incentive-based compensation to executives who earned it through fraudulent behavior. What's more, the policies are supposed to discourage that behavior in the first place. Clawbacks still aren't invoked all that much, but they have come up lately. Earlier this year, two Wells Fargo (wfc) executives gave back some of their pay amid the bank's recent phony accounts scandal.

Yahoo has a clawback provision, and Mayer's pay is covered by it. But the company's policy only permits Yahoo to recoup executive pay "in the event of a restatement of incorrect Yahoo financial results" — basically accounting fraud, and that's it. Not covered by a clawback: Allegedly covering up two hacking incidents so you can complete a multi-billion sale of your company's main business.

There's next to no chance of a Yahoo restatement no matter what the SEC investigation finds, because the Yahoo hacks, no matter what the gap was between when they were discovered and when they were disclosed, aren't going to change how much money the company made in the past. And that means Mayer gets to keep her pay, even if the company ends up paying a big fine for breaking securities laws.

Indeed, Yahoo's clawback provision appears to be behind the times. While clawback provisions used to just cover financial restatements, many companies have expanded them to include not just fraud but any conduct that could hurt the reputation of the company. Wells Fargo's clawback provision allowed for that company to revoke bonuses if it was proven that an executive was not able to manage risks in their division, which is broad enough to cover almost any actions that result in a financial loss or fine.

In fact, if Mayer already worked for Verizon when she received her cash and stock bonuses she'd probably be in greater danger of losing a chunk of her bank account. Verizon's broader clawback policy stipulates that the company can "cancel" or require repayment of executive pay if that person engages in "certain fraudulent or other inappropriate conduct" including "financial misconduct."

When Verizon (vz) agreed to buy Yahoo for $4.8 billion last summer, it also agreed to pay so-called golden parachute compensation to Yahoo executives on Yahoo's management team including Mayer—allowing them to collect the full amount of their incentive-based stock awards upon completion of the merger, regardless of performance.

That means that when the deal closes, Mayer's net worth would immediately increase by $45 million (in stock awards, based on Yahoo's $42.40 share price at Monday's close), while she'd also be entitled to collect more than $3 million in salary, bonus and benefits for an additional year after leaving the company. Add in the $93 million in Yahoo shares she currently owns, which she'd be free to sell as she pleases when she's no longer CEO, and Mayer's total payday amounts to more than $141 million.

Under Verizon's policy, covering up a cyber attack that exposed the data of more than one billion Yahoo users might fall in the misconduct or fraud category—especially when Yahoo didn't say anything about the hacks before it sold itself to Verizon. But as Mayer's employment contracts are with Yahoo and not Verizon, and Yahoo retained responsibility for the cost of its equity awards as part of the deal, it would be difficult for Verizon to touch her pay even if it wanted to.

There is one way that Yahoo could get out of paying Mayer the full golden parachute windfall—but it's a long shot: Yahoo would have to fire Mayer for cause. Mayer's severance agreement, and nine-figure payday, is contingent upon her termination without cause. But if the SEC investigation found she committed fraud, perhaps Yahoo could find reason to fire her. But such a punitive blow almost never happens in the corporate world. Even Enron's executives were able to say they were leaving for personal reasons.

The question of Mayer's pay brings to light the way regulators—and shareholders—have struggled to hold corporate management accountable for their wrongdoing. The SEC proposed a clawback rule in 2015 that would require companies to adopt recoupment protocols for executive pay—but even then, the rule would mandate clawback policies only as strong as Yahoo's, in the event of financial restatements. Such restatements are rare, typically occurring when a company discovers accounting errors or improprieties later on, such as when Valeant Pharmaceuticals (vrx) had to redo its financial reports last year. Even so, the rule was never finalized, and now that Donald Trump has become the President, preaching a regulation-lite approach to business, the SEC clawback rule, along with other pay measures, will likely be kicked further down the road.

Verizon itself put scant strings on its deal with Yahoo. In a conference call when the deal was first announced in July, Yahoo board member Tom McInerney explained to an analyst that little could stand in the way of the transaction: "The answer is no, there’s no performance conditions that are conditions to close at all," he said.

Clearly, Yahoo heard McInerney loud and clear.

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