The regulatory and legislative fallout stemming from the Wells Fargo scandal has begun with an article by the Roosevelt Institute which characterizes Section 162(m)'s pay for performance exception as having led to the "outright fraud" of the cross-selling scandal. However, the arguments levied by the Roosevelt Institute - a frequent and repeat critic of Section 162(m) - are based largely on company practices which have not been prevalent in several years. At this point, the lines of attack on Section 162(m)'s pay for performance exception, which only permits companies to deduct executive pay in excess of $1 million if it is “performance-based,” are all well documented and the provision has been repeatedly targeted by both Democrats and Republicans for repeal. However, the Roosevelt Institute goes so far as to suggest that performance pay, as a whole, "encourages lawbreaking" and tries to analogize the Wells Fargo scandal to other executive pay practices it deems as having contributed to out-sized pay or that amount to unethical practices.
- Option-Intensity: The first parallel the article tries to draw is by citing a study which discusses how the heavy use of options contributed to securities fraud at companies. The article, however, fails to note that the use of options has dropped significantly over the past several years in favor of performance shares as the result of changes in accounting rules and investor preferences to the point that among S&P 500 companies, options in 2015 averaged only15% of the total pay mix, down from 20% in 2011 and 54% in 2004 even then, only 64% even grant options at all, down from 80% in 2011.
- Option Backdating: The article also tries to connect Wells Fargo and 162(m) to the options backdating scandal of the mid- -2000s. The article fails to state exactly how or why there is any connection and does not mention that it has been roughly 10 years since backdating was an issue.
- Using Stock Buybacks to Buy Options for Executives: Finally, consistent with recent themes of short-termism, , the article claims that executives have pushed buybacks to buy themselves stock options with the money.
The article's cobbled together arguments provide no evidence whatsoever that a repeal of the performance-based pay exception in 162(m) would reduce the likelihood that something like Wells Fargo would happen again or that it would reduce executive compensation. Instead, the article is yet another attempt at piling on a recent scandal to push a legislative agenda in advance of next year. Efforts to target and repeal the pay-for-performance exception of Section 162(m) have frequently taken place over the past several years with the most recent effort happening earlier this year with a bill that would make the pay for performance exception contingent on employee wage growth. Expect more such attempts as a new Administration assumes the White House.