A major reason that Wells Fargo and CEO John Stumpf are getting beaten up like no other bank or CEO since the financial crisis is that they’ve handled their fake-accounts scandal wrong since day one almost a month ago. As a result, they’ve been forced to play defense rather than offense ever since. An apt example is the announcement that the board would claw back $41 million of Stumpf’s pay – an impressive move, but it happened only after the Senate Banking Committee held a bipartisan hostility fest with him as the focus. So the board’s action looks insincere, as if it wouldn’t have happened without pressure from the Senate committee.
And by the way, that clawback isn’t quite what it appears to be.
The average person reading a typical headline on the story – “Wells Fargo to Claw Back $41 Million of Chief’s Pay Over Scandal” said the New York Times – might reasonably suppose that Stumpf would have to write a check for $41 million to return money he’d been paid. But in fact he hadn’t received any of the money that’s being “clawed back.” The board’s action applied only to another form of compensation, stock awards, and only to those that had not vested, meaning he could not yet turn them into money even if he had wanted to. What’s more, if the awards had not been clawed back, some of them might never have vested at all, since the number of awards that would vest over a three-year period was “subject to adjustment upward (to a maximum of 150% of the original target number granted) or downward to zero” based on the bank’s performance vs. its peers, as the company explained in an SEC filing. Stumpf is giving up money he hasn’t earned yet. It’s possible he might never have received at least some of it.
A separate angle makes unvested stock awards a still more congenial form of compensation to have clawed back, if one’s pay must be clawed back at all. The average headline-reader imagines the executive paying back money deposited previously in his or her bank account. When that happens, it’s even more painful than it sounds. The executive presumably paid income tax on that income when it was received in some previous year, so he or she kept only a fraction of the total. But when it’s clawed back, the executive must pay back the whole amount, and it’s far from certain that he or she can recover the income tax that was paid to Uncle Sam. The tax code generally prohibits this if the clawback happens in a year subsequent to when the executive received the money, which is usually the case. So in a clawback of real money, the executive may have to pay back far more, perhaps twice as much, as he or she actually received after tax.
But that’s not what happens when unvested stock awards are clawed back. In that case, the executive typically has not paid any tax on the awards (though in rare cases that are complicated to explain, he or she might have chosen to do so). So he or she need not worry about trying to recover taxes.
Make no mistake, Stumpf is losing something that is probably of great value. While his unvested stock awards were valued at $41 million on the day the board acted, that amount assumes all of the awards would actually have vested, and it varies with the stock price. Their actual value when Stumpf turned them into money could have been much less, conceivably even zero, or could have been a great deal more. No one knows.
It’s worth remembering that not all clawbacks are equal. If an executive has to give back compensation, unvested stock awards are about the best form in which to give it back.
Attention beer lovers: The new Fortune Unfiltered with Aaron Task features Jim Koch, founder and chairman of Samuel Adams. Get it here.
We’re switching to a new email provider soon. To make sure you keep getting Power Sheet, please whitelist or add firstname.lastname@example.org to your address book.
You can share Power Sheet with friends and followers here.
What We’re Reading Today
Deadline set for Brexit
Prime Minister Theresa May says she will formally start the process of leaving the European Union by the end of March. From the time she invokes Article 50, the country will have two years in which to negotiate the U.K.’s exit, with a goal of protecting the economy. Fortune
Trump allies try to counter fallout from tax revelation
The campaign scrambled after the New York Times reported that Donald Trump claimed a $916-million loss in 1995, legally enabling him to avoid income tax for up to 18 years. New Jersey Governor Chris Christie said Trump didn’t break the law. Trump argues that the disclosure demonstrates his business acumen. USA Today
McDonald’s China franchise deal could bring in $2 billion
Steve Easterbrook‘s McDonald’s will franchise its company-owned restaurants in China; it owns 65% of its 2,200 Chinese outlets. With interest from at least six bidders, including Carlyle Group and Bain Capital, the deal could bring in $1.5 billion to $2 billion. McDonald’s will retain minority stakes in the stores, collecting 5%-7% of sales for 20 years. WSJ
Iger considers Disney’s next move
As Disney stock stagnates and the company’s ESPN business struggles, analysts speculate on how CEO Bob Iger will jumpstart growth. The leading theory is an acquisition, but guesses about a target have moved from Vice Media to Spotify to Jack Dorsey‘s Twitter. NYT
Building a Better Leader
Power posing may not work after all
Dana Carney, who co-authored a study showing that certain poses increase testosterone in people, now says she doesn’t think “that ‘power pose’ effects are real.” New York Magazine
Criticism by others can be a great motivation
But don’t just get angry. Also address your shortcomings to prove the haters wrong. Fortune
The impact of co-leadership
Two leaders atop a company can make compromise and problem solving parts of the organizational culture. SmartBrief
Colombia voters reject peace deal
After four years of negotiations, Colombian president Juan Manuel Santos struck a peace deal with Farc rebels, but Colombian voters narrowly rejected the agreement. Opponents felt the deal was too lenient, enabling rebels to avoid prison by confessing to crimes. BBC
Gannett nears purchase of Tronc
After months of pursuit, Bob Dickey‘s Gannett looks near to capturing Tronc with a bid between $18.50 and $19 per share. The two sides could sign the agreement as early as this morning. Gannett’s pursuit of Michael Ferro‘s Tronc (previously Tribune Publishing) grew publicly contentious, and one of Tronc’s top shareholders has threatened to sue in the event of a deal. Fortune
Deutsche Bank continues to negotiate a fine
John Cryan‘s company is negotiating with the Justice Department on settling mortgage-securities cases. The government originally proposed a $14-billion fine. Deutsche Bank said it doesn’t expect to pay that, and unconfirmed reports on Friday placed the amount at $5.4 billion. The fine could significantly reduce Deutsche’s capital. WSJ
Up or Out
Tom Lynch will step down as TE Connectivity CEO in March, to be succeeded by Terrence Curtin while continuing as executive chairman. Nasdaq
Fortune Reads and Videos
American Airlines changed its flight attendants’ uniform…
…this month and has already received over 400 complaints that the new clothes are making employees sick. It’s the first new uniform in over 30 years. Fortune
Reports of unsafe conditions at Blue Apron facilities
Reports claim unsafe conditions, a lack of oversight, and sometimes violent responses by employees at one of the company’s packing facilities. Fortune
Will the Wells Fargo scandal change the way you bank?
It could prompt another close look at banking culture. Fortune
Quote of the Day
“We will invoke Article 50 no later than the end of March next year…Parliament put the decision to leave or remain inside the EU in the hands of the people. And the people gave their answer with emphatic clarity…So now it is up to the government not to question, quibble or backslide on what we have been instructed to do, but to get on with the job.” — U.K. Prime Minister Theresa May announcing the timeline to notify the E.U. that the U.K. will leave the union. Fortune