The NASPP Blog

October 19, 2010

Clawbacks and Executive Compensation

According to the NASPP’s 2010 Domestic Stock Plan Design Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute), 68% of respondents report that their stock compensation programs are not subject to a clawback provision. I’m hearing predictions that this will change, with more companies implementing clawbacks for executive level employees in the future.

Clawback Provisions
A clawback provision enables the company to recover, or “clawback” previously paid or realized compensation upon the occurrence of specified events or behavior. Historically used to enforce noncompete provisions, we are now seeing clawbacks for financial restatements due to misconduct or compliance failures, inaccurate financial reports, and fraud or ethical misconduct (whether or not it results in financial restatement). I’ve even heard of a company including a clawback on performance awards if the board later determined that the way the performance goal was achieved wasn’t quite the behavior they were looking for. Clawbacks can apply to bonuses and various types of stock awards, including stock options, restricted stock/units, and performance awards.

Why Clawbacks Now?

Clawbacks are hot now in part because several recent pieces of legislation have required them, including SOX, the Emergency Economic Stabilization Act, and, most recently, Dodd-Frank. Although the requirements are fairly limited in each case (for example, EESA only applies to TARP companies), regulator interest in clawbacks is likely indicative of the public and media support for them. And now clawbacks are viewed as an effective tool for mitigating risk in compensation programs.

In evidence of how hot clawbacks are today, they were a topic at numerous excellent sessions at this year’s NASPP Conference, including “Key Fixes for Today’s Stock Plans: Clawbacks, Double-Triggers, and Hold-through-Retirement, ” “Risk Mitigation for Stock Compensation,” and “Get the Lead Out: Ten Essential Stock Plan Updates.” Here are some of the things I learned from these sessions.

Implementing Clawbacks

In addition to the obvious questions that must be addressed when implementing clawbacks–who should the clawback cover, what compensation should it cover, what events should trigger it, and how long it should be in effect–there are a number of more sophisticated matters to address:

  • Should the clawback be a provision in the plan or award agreement or should it be a more general policy?
  • Will the clawback be enforceable? State laws can be a particular hindrance to enforcement, so this question is not always as easy to answer as you might think, given that federal laws require clawbacks in some circumstances.
  • How will the clawback be communicated to executives and what level of consent will be required from them (for example, executives have to indicate consent by signature)? If the clawback policy covers previously granted awards, what will the consequences be if executives don’t consent?
  • What level of discretion to enforce (or not enforce) the policy will be provided to the board?

If a company has a clawback policy or provision in place, one tip from the “Risk Mitigation for Stock Compensation” panel is to discuss the policy prominently in the Executive Summary of the CD&A in your proxy statement. Clawbacks are exactly the type of risk mitigation strategy that ISS and shareholders (and other shareholder advisory groups) are looking for; having a clawback policy could offset other problematic compensation practices.

The panel also included a detailed discussion of the tax treatment that applies when a clawback is triggered–information that is likely to be very useful in the future as we see more enforcement of these provisions.

Conference Audio Available
If you missed these panels and want to know more about clawbacks, don’t despair–you can purchase the recorded audio for any and all Conference sessions in downloadable MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.

Free Conference Session Audio If You Renew by Dec 31
All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!

Join Now and Get Three Months Free!
If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free.  Tell all your friends!

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara