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Wells Fargo to Claw Back Millions of CEO Pay Post Sales Scam

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Chairman and CEO of Wells Fargo & Company (WFC - Free Report) , John Stumpf is set to forfeit all of his outstanding unvested stock awards of around $41million, as the once largest bank of the nation tries to calm the public and political outrage sparked by the sales scandal. The company announced that it has also initiated an independent investigation into its retail banking sales practices and related affairs.

Stumpf, who has been facing huge criticisms following the bank’s $190-million settlement to resolve regulators’ claims of illegally opening millions of unauthorized accounts, has also agreed to forgo his salary during the investigation. Also, Carrie Tolstedt, who headed the company’s community banking unit, will forfeit all of her outstanding unvested equity awards of around $19 million.

Tolstedt, who left Wells Fargo, earlier than her planned year-end retirement, has agreed not to exercise her outstanding options during the investigation. Moreover, she will not receive severance or any retirement increments.

Additionally, both Stumpf and Tolstedt will not be awarded bonus for 2016.

Lead Independent Director of Wells Fargo – Stephen Sanger – stated that the company may take further actions mentioning, “Based on the results of the investigation, the Independent Members of the Board will take such other actions as they collectively deem appropriate, which may include further compensation actions before any additional equity awards vest or bonus decisions are made early next year, clawbacks of compensation already paid out, and other employment-related actions.”

According to a report by The Wall Street Journal, “The awards being forfeited by Mr. Stumpf represent about a quarter of the total compensation he has accrued over his nearly 35 years at the bank,” citing  an independent analysis by human-resources consultancy Overture Group LLC. In 2015, Stumpf had received total compensation of $19.3 million.

The latest actions emerge after a week, when Stumpf testified before the U.S. Senate Banking Committee. He apologized for unethical sales practices and specifically mentioned that there was no “no orchestrated effort or scheme” by the bank to promote the wrongful sales practices. However, Stumpf was grilled at the hearing, where committee members, including Democrat Elizabeth Warren, demanded his resignation.

Stumpf is also expected to testify at a hearing on Thursday before the U.S. House Financial Services Committee, which has commenced an investigation into the bank.

Wells Fargo Clawback Policies
 
Similar to other banks, Wells Fargo has a number of clawback or recoupment policies applicable to its executive officers. According to its proxy statement, the incentive pay can be clawed back, in case there is inaccurate financial information or misconduct by an executive, that has resulted to restatement of all or substantial part of financial statements.   

Also, shares issued to the bank’s executives based on performance can be clawed back on several occasions. These include misconduct or error committed by the executives, causing “reputational harm”, or "improper or grossly negligent failure“ and in the event when the company or the executive’s  business group suffers a significant downturn in financial performance.

Bottom Line

The forfeiture of compensation indeed comes as an embarrassment for Stumpf, the head of a banking giant that had earned admiration for steering well through the onslaughts of the financial crisis.

In 2012, markets witnessed clawbacks of pay, which are unusual for large banks, when JPMorgan Chase & Co. (JPM - Free Report) slashed CEO Jamie Dimon’s compensation by more than 50%, following the fallout of “London Whale” scandal. Also, a number of senior executives returned the maximum amounts permissible under their employment terms.

Since the announcement of the settlement on Sep 8, shares of Wells Fargo, whose troubles continue to deepen with probes and lawsuits, lost more than 9%. Year-to-date, the company’s shares fell around 17%, compared with  3% decrease in the KBW Nasdaq Bank Index.


Wells Fargo currently carries a Zacks Rank #3 (Hold).

Stocks Worth Considering

Banks that are worth a look include Comerica Incorporated (CMA - Free Report) and State Street Corporation (STT - Free Report) .

Comerica currently carries a Zacks Rank #2 (Buy) and has been witnessing upward estimate revisions. Over the past 60 days, the Zacks Consensus Estimate for 2016 advanced nearly 2% to $2.72 per share. Also, the stock gained over 12% year to date.

Currently carrying a Zacks Rank #2, State Street has been experiencing upward estimate revisions over the past 60 days. The Zacks Consensus Estimate for 2016 advanced more than 2% to $5.03 per share. Year to date, the shares of the company gained around 6%.You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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