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Mentioned, Law360
April 9, 2018
4 Ways #MeToo Is Affecting Executive Compensation

Share us on:   By Christine Powell

Law360 (April 9, 2018, 5:49 PM EDT) -- The #MeToo movement that has made headlines and spelled professional downfall for many powerful men accused of sexual misconduct in the workplace is also prompting companies to take a fresh look at their approach to executive compensation.

Taking steps to prevent sexual harassment — and address it when it happens — has always been a best practice. But the movement, which coalesced in October after New York Timesand New Yorker exposés detailed decades of alleged sexual harassment and abuse by Hollywood producer Harvey Weinstein, shined a spotlight on the issue and spurred companies’ ongoing efforts to protect employees, minimize legal risk and improve company culture.

“On the one hand, it’s great that people are focused on it,” said Cleary Gottlieb Steen & Hamilton LLP counsel Caroline Hayday said. “On the other hand, it’s hard not to be frustrated that it took this long.”

Here, experts discuss how #MeToo is influencing pay policies for companies’ top brass.

Clawback and Forfeiture Language Taking On Added Significance

Companies may be making sure contract clauses that provide for the right to claw back or forfeit payments to executives cover scenarios where they violate sexual harassment policies, experts said.

“There’s a lot more focus on what kind of hooks do we have when someone misbehaves to take away either compensation that they haven’t yet vested in, or maybe compensation they have vested in,” Hayday said.

It’s easier to cease future payments than to take back ones that have already been disbursed, so enforcing a clawback provision might require a lawsuit. But while litigation might be expensive and time-consuming, companies could now be more willing than they would have been in the past to go to court to enforce either clawback or forfeiture provisions, according to experts.

“Because companies know everybody’s watching now, if they have those provisions already in their agreements, I think there’s going to be a greater focus on making sure that they are exercising whatever rights they have to forfeiture, to clawback, under the agreements,” Polsinelli PC shareholder Jamie Zveitel Kwiatek said.

“Cause” Now Top of Mind

Companies might also be taking a closer look at cause definitions to ensure that there are grounds to terminate an executive for cause should they flout sexual harassment policies, experts said. During negotiations executives typically push for narrower definitions of what constitutes cause for discipline, while companies want broader language, Kwiatek said.

Winston & Strawn LLP partner Joseph S. Adams said there’s usually a laundry list of things that constitute cause and many definitions probably have “something already about violation of any company policy.”

However, “if you’re inking a new executive employment contract, you might build that out a little bit more to say cause will also be deemed to have occurred if you violate any of the company’s policies, including, without limitation, the policy against sexual harassment,” he said.

Experts also say the #MeToo movement may make companies more assertive during such negotiations with respect to arguing that they should have cause to fire an executive who has engaged in harassment or other misconduct.

These days, companies might be more likely to take “a harder stance on requiring that violation of their harassment policies is specifically a for-cause termination right that would trigger forfeiture of benefits, severance, et cetera,” Kwiatek said.

Incentives Can Link to Goals

Companies can also consider factoring in organizationwide accountability for behavior when drafting incentive programs, which require employees to meet certain metrics to receive incentives, according to experts.

For example, those metrics could account for whether sexual harassment training is happening at all levels or how many incidents of sexual harassment claims the company has in a given year, Kwiatek said.

“You’re setting your standards so that executives are being held accountable not only for their own behavior, potentially, but also for that of other employees,” she said.

That approach encourages good behavior — the carrot rather than the stick, she said.

Meanwhile, Cadwalader Wickersham & Taft LLP partner David Teigman said some companies may be responding to the movement by raising pay for women in order to close the gender gap.

“We hear anecdotally that there’s this concept, potentially, of tying compensation to goals that incorporate diversity and pay gap milestones, among other goals that you would more typically see,” he added.

Companies Seeking Upfront Promises

Companies may also ask executives during negotiations to represent that they have not engaged in any kind of misconduct that would violate sexual harassment policies, according to experts.

“You can have a representation and warranty for a number of things — that they’re not violating a noncompete in coming to work for you, that they do not have these prior bad acts in their history,” Kwiatek said. “Certainly if you find out that they did and they violated their representation and warranty, if your contract is drafted properly, it would give you the right to terminate for cause.”

Hayday also said that companies might start asking for those kinds of representations, but added that executives’ counsel are likely to advise them to push back given their broadness. It would be easier for companies to stay firm on the representations if they became market practice.

“I do think companies are going to try it,” she said. “And I do think certain companies could be successful in effectuating change. I mean, if Google or Facebook insists on this, they are such hot employers that people will probably sign almost anything to get their chance.”

--Editing by Brian Baresch and Kelly Duncan.