ILLIAM A. WISE hit the jackpot when his company hit its number. After the El Paso Corporation, the energy company in Houston, reported a profit of $93 million in 2001, Mr. Wise, its chief executive, was rewarded with a $3.4 million bonus, 768,250 stock options, $1.7 million of restricted stock and $3.7 million in "other compensation." And that was on top of his regular salary of $1.3 million.
Just two years later, however, El Paso had this to say about its performance leading up to Mr. Wise's big payday back then: Oops!
El Paso's board ousted Mr. Wise in 2003, and last year the company reported that it actually had a loss of $447 million in 2001. As it turns out, the company said, "certain personnel used aggressive, and at times, unsupportable methods to book proved" oil and gas reserves. The numbers for other years were wrong, too, it added.
Now that the record has been set straight, will Mr. Wise be giving back all that extra money he received for meeting his performance goal - hitting his number, in industry parlance - when, in fact, he didn't even come close? Not a chance. And therein lies the rub.
Hundreds of companies have restated earnings in recent years - 414 in 2004 alone, according to a recent study by the Huron Consulting Group. And in many cases, the revisions came in the wake of discoveries of questionable accounting or other possible wrongdoing that meant the numbers leading to bonuses were inaccurate. But a review of restatements by large corporations shows that companies very, very rarely - as in almost never - get that money back. The list of restatements was compiled for Sunday Business by Glass Lewis & Company, a research firm based in San Francisco.
Sometimes, the lawyers' fees and other costs of clawing back the money would exceed the amount to be recouped. But even when the bonuses are big enough to justify the effort to recover them, many companies choose not to do so - and don't explain why.
A spokesman for El Paso said that the company was in the midst of various government investigations of the reserve revisions and had not yet made any effort to recover bonuses paid to Mr. Wise. Calls to a lawyer for Mr. Wise were not returned last week.
Recovering money paid to any executive - Mr. Wise is far from unique - is not easy, lawyers say. Because the recipient may well resist giving anything back, such efforts can be costly, perhaps even impractical and counterproductive, lawyers say.
"In a real-life situation, the legal rights often take a back seat to the business practicalities," said Michael R. Young, a securities lawyer at Willkie Farr & Gallagher in New York. "If you've got an evil C.E.O., you want to get him out the door."
Shareholders might have hoped that legislation passed in 2002, in the wake of corporate scandals involving Enron, WorldCom and others, would help them recover some of their losses from the executives who grew rich on stock prices inflated by incorrect earnings reports. Those hopes have proved as false as the financial reports themselves.
The law, the Sarbanes-Oxley Act, requires top executives to pay back bonuses if the numbers on which they are based were incorrect. But so far regulators have not enforced the provision, in part because the law took effect only in July 2002.
SARBANES-OXLEY also set specific triggers that force a payback: there must be an accounting restatement, the law applies only to chief executives and chief financial officers, and there must be evidence of misconduct as opposed to honest error.
The numbers in question are substantial, more than many people earn in a lifetime. "If one had to guess, and this is a guess, this is the kind of thing where even in a normal, publicly held company, not a really huge one, then you could be talking about $1 million to $10 million" per chief executive, said Henry T. Hu, a corporate and securities law professor at the University of Texas at Austin. "The numbers we're talking about are really quite large."
There are several reasons that companies may not try to recover payments that were based on incorrect numbers, lawyers said. One is the fear of bad publicity that can accompany a public brawl over the precise terms of executives' contracts.
"Often disputes over potentially inflated bonuses arising out of false earnings reports are resolved through discussion, rather than through litigation," Mr. Young said. "High-profile litigation in that kind of context, with the company and the chief executive shouting loudly at each other, doesn't help keep the problem out of the newspapers."
Another reason is the cost of litigation. But even when the bonuses may be small enough that they do not justify the cost of filing a lawsuit, Mr. Hu said, companies could be vulnerable to shareholder lawsuits because "in a sense the company is making a gift to a particular person, and that's not allowed." After all, he noted, company directors have fiduciary duties to shareholders. "How can the company simply make gifts to people?" he said.
In some cases, the answer lies in executives' employment contracts, which often let bosses keep any compensation once their checks have cleared. "The employment contracts don't have the necessary clauses in them to give the board the power to go draw that back, and that's something that boards really need to change," said Lynn E. Turner, a former chief accountant at the Securities and Exchange Commission who now oversees research at Glass Lewis.
Companies may be beginning to address this problem. International Paper reported in a regulatory filing last month that it had added provisions to its long term incentive compensation plan to make it clear that the company can "recover compensation paid to a participant in cases of a restatement of the company's financial statements due to errors, omissions or fraud."
Past bonus payments can become tangled up in contracts that specify what executives receive when they are forced out. A former chief executive of Dynegy, another Houston energy company, received a total of nearly $10 million for the company's performance in 2000 and 2001, years for which the company later revised its financial results downward. But instead of recovering any of that money, Dynegy ended up paying even more to the executive, Charles L. Watson. After a dispute over how much Mr. Watson was eligible to collect upon leaving the company, an arbitrator concluded that it owed him $22 million in severance, regulatory filings show.
A Dynegy spokesman declined to elaborate on the case. "The regulatory filings speak for themselves," said David Byford, the spokesman.
Since then, no one has sought to force Mr. Watson to pay back the bonuses, said Thomas C. Godbold, a lawyer for Mr. Watson. He added that the payback provision of Sarbanes-Oxley did not apply because the Dynegy restatement affected earnings that predated the law.
"The restatement happened after the effective date, but the bonuses were paid before the effective date," Mr. Godbold said. The law, he added, "doesn't apply to Mr. Watson's situation."
The S.E.C. has the authority to ask a company why it did not recover a bonus, but other aspects of the law are still unclear, said Tim Sullivan, a securities lawyer at Hinshaw & Culbertson in Chicago. The law, for example, but does not specify what may constitute misconduct or who must label it as wrongful, he said.
The commission may yet draw on this provision, Mr. Sullivan added, but it can take years for the agency to build a case against a particular executive, given the time needed to gather and review evidence. "I also think the S.E.C. will probably look for a good case to make the point and put people on notice," he said.
It would take only one case, said Joel Seligman, dean of the Washington University School of Law in St. Louis, but these days the commission may be overwhelmed by the number of cases confronting it. "If the S.E.C. brings one or two illustrative cases," he added, "you're likely to see a high level of voluntary compliance."
Although the S.E.C. already has the authority to recover salaries and bonuses by filing civil lawsuits against executives to compel them to pay money back, preparing a case against an executive to recover the money takes time, say lawyers who have worked at the commission. Lawyers who have faced the S.E.C. say years may pass before the agency draws on its relatively new authority to go after bonuses.
Harvey J. Goldschmid, one of the agency's commissioners, said the S.E.C. would try to recover much more than bonuses from executives who gain from fraud. "Where hard-core fraud is involved, senior executives will have to disgorge all of their compensation," he said, meaning they would have to return all they were paid, including stock options. "We'll ask for everything."
SOMETIMES, executives do return money. A dozen senior executives at Nortel Networks voluntarily agreed to repay $8.6 million in bonuses after the company restated its revenue from 2001 to 2003. A spokeswoman, however, said the company filed a lawsuit earlier this year against its former chief executive, chief financial officer and chief operating officer to try to recover $10 million in bonuses they received.
The aggressive moves by Nortel are the exception, not the norm. More typical is Qwest Communications, the telecommunications company whose former chief executive, Joseph P. Nacchio, received performance-related bonuses of $2.3 million in 2000 and $1.5 million in 2001. In 2003, however, Qwest revised its earnings for those years because of improper accounting. A company spokesman said that Mr. Nacchio did not return any of the money and that the company has not tried to get it back. The S.E.C., however, is preparing to file a civil lawsuit against him, according to people with knowledge of the matter.
Generally, from the perspective of fairness, action by regulators or lawsuits by a company should not be necessary, said Mr. Turner of Glass Lewis. Executives given bonuses based on data that turn out to be wrong should return the money, at least if they are paid a significant salary, he added.
"I just think that morally, if the bonuses should never have been paid out to that group, then that group shouldn't get to keep any of it, regardless of the law," he said. After all, he noted, if a bank accidentally deposits money in a customer's account, the customer cannot keep it.
"It was wrong to pay them," he said, "and they never should've gotten it."