Agenda – Should Boards Cut Bonuses When the Company Faces a Big Fine?

Credit Suisse will face shareholders at its annual meeting today after investor outcry led executives at the bank to announce in April that they would cut their bonuses by 40%. Investors and proxy advisors were angry about performances issues as well as a $5.3 billion fine linked to certain mortgage practices in the U.S.

Boards at several companies have faced the tricky decision of how to pay out incentive awards to executives if the company is facing a significant regulatory or legal fine. For example, Mylan’s board has also faced press scrutiny regarding how it will decide to incorporate a $465 million Medicaid settlement into 2016 incentive payouts.

The board of global mining company BHP Billiton in 2016 agreed to pay no short-term bonus to its CEO. The company cited a Brazilian mining disaster that led to a more than $40 billion legal claim. In 2014, the head of BHP’s compensation committee, Carolyn Hewson, was labeled in the press as a “master of discretion.”

“There really is no rule of thumb when it comes to, especially, litigation-related expenses, but you can be almost certain that most litigation was for some sort of misbehavior,” says John Trentacoste, partner at executive compensation firm Farient Advisors. At the same time, he says, boards can often find themselves under the microscope while having to decide whether management should be held accountable for costly legal and regulatory issues.