Wells Fargo CEO’s Forgone Stock Awards Could Go to Other Employees

By:
Chris Gaetano and Dominic G. Diongson
Published Date:
Oct 4, 2016

MoneyMagnifyWells Fargo & Co.’s CEO, John Stumpf, will not receive compensation of as much as $41 million in unvested stock awards this year, after a case of fake customer accounts puts into question his leadership of the bank.

In addition, Carrie Tolstedt—who served as head of the community bank before stepping down because of the company’s improper sales practices within its retail banking unit—would forfeit about $19 million in unvested equity.

With those stock awards unlikely to be exercised for executive compensation, questions abound as to what happens to them on the bank’s balance sheet. There are some solutions, including awarding the unvested stock to other employees.

Margaret A. Wood, a member of the Society’s Financial Accounting Standards Committee and also a Society past president, said that any unvested stock options awarded to Stumpf will be canceled. Depending on the plan, the underlying number of shares of stock will either remain available to the plan, and Wells Fargo could issue another set of options to employees using these shares or the shares will be released from the plan and will not be available for the plan to issue new stock options, she added.

"The stock options will be cancelled,” said Wood. “The stock underlying the options will not be cancelled. So what happens if they cancel those options? Each option, when you grant it, blocks a number of shares, and those shares will be released and go back into the pool and then can be used again for stock options, to grant new options to someone else. Or depending on the plan those shares will be released from the plan and are not available to be used again for issuance of stock options under the plan.”

Stumpf’s stock awards for this year would have been more than the combined compensation for 2014 and 2015, when he was paid $19.3 million in each of those years. That included his base salary of $2.8 million and incentive of $4 million. Compensation for each of those years was based on the bank’s “pay for performance” philosophy. For 2015, as well as for 2014, Stumpf was awarded $12.5 million in stock for his performance as part of long-term equity incentives, but there was no award based on restricted stock, which would have had a vested period of a few years. 

Jo Ann Golden, chair of the Society’s Banking Committee and a Society past president, said that a company’s board, via its compensation committee, determines a plan to distribute stock options as part of the compensation plan to certain executive officers, and, crucially in Wells Fargo's case, how clawbacks of stock options would function as well. She noted, though, that while this means the specifics might vary by company, they tend to follow certain best practices in creating these plans. For example, on options that are expensed as compensation, many companies calculate the value of options using the Black-Scholes method.

“It depends how they lay out their plan,” she said. “But I do know that the compensation plans are very well defined, and usually listed in the proxy.”

Golden pointed out that since the Sarbanes-Oxley Act and Dodd-Frank Act have come into play, clawbacks have become part of these best practices as well. They’ve become an important item to hold executives to the highest standards as well as to withhold rewards from executives when certain goals are not met, she said. The board always has to be concerned with the best interest of the company's shareholders, balanced with a way for the board to be fair in terms of how compensation is distributed among executives. She added that, at least from the perspective of the Securities and Exchange Commission, it was also a good tool to punish errant executives.

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