CEOs Pay the Price for Scandal

CEO payWhether it’s a companywide pattern of unseemly actions or one rogue employee’s dirty deeds, corporate misconduct happens.

And, when it does, the chief executive has to answer for it.

Theoretically, anyway. But how do you hold CEOs accountable for ethical breaches—and deter future lapses—that occur on their watch?

One way is to hit them in the wallet, in the form of reduced salaries or forfeited bonuses, for example.

Earlier this week, the Wall Street Journal suggested that more boards are taking that route, in a piece highlighting a few prominent examples of CEOs who have recently seen their compensation cut in the wake of scandal (subscription required).

For instance:

  • The board of directors at GlaxoSmithKline cited the settlement of bribery charges in China (and the company’s sinking profits) when it slashed CEO Andrew Witty’s pay nearly in half.
  • Rolls-Royce Holdings chief executive John Rishton saw his salary cut last year amidst a series of bribery and corruption scandals that continue to plague the company.
  • Faced with sliding profits and a spate of compliance issues, soon-to-be former Standard Chartered CEO Peter Sands recently announced he would forego a bonus reportedly in the neighborhood of $6 million.

Richard Leblanc, an associate professor of governance, law and ethics at York University, told the Journal that affecting executives’ pay incentives is “the best way to control management” in terms of preventing bad behavior and unsavory business practices.

In the same piece, Leblanc says boards are taking an increasingly unforgiving stance on such transgressions, withholding CEO pay and vesting of equity as part of a broader trend of “risk-adjusted” compensation.

In some cases, chief executives may be forced to fall on their swords even if untoward behavior took place before he or she took over the top spot.

In fact, CEOs should be prepared to do just that, according to Alan Johnson, managing director of compensation consulting firm Johnson Associates.

“It may not be your fault,” Johnson told the Journal. But “the lesson for executives is to expect it.”

Johnson urges CEOs to “get out ahead of the board” and actually volunteer to have their pay cut or to waive a bonus in such a situation.

“It’s probably going to happen anyway,” he said, “so why go through the pain of [the board] having to agonize over it?”