The NASPP Blog

The term “clawback” represents a concept that’s been around for a while and it’s fairly simple to grasp the basics. Essentially, a clawback is a policy that entitles a company to recoup all or a portion of stock option, bonuses and other incentives from top executives under certain conditions. The intent of these provisions is usually an attempt to influence the behavior of the executive – to encourage or deter them from certain actions. The Sarbanes-Oxley Act of 2002 and Dodd-Frank both contain provisions that cover clawbacks. Dodd- Frank mandated further expanded repayment provisions, and we are still waiting for the SEC to propose the rules and adopt them. Although final clawback rules are yet to be released, companies continue to evolve in their usage of these provisions. In April 2014, PwC released its Executive Compensation: Clawbacks – 2013 Proxy Disclosure Study, which analyzed clawback trends using proxy disclosures for Fortune 100 and other large companies from 2009 – 2012. I’ll recap some of the key highlights in today’s blog.

• 92% of companies have policies in place to recoup compensation if there’s a restatement of financial results. According to PwC, “of those 92%, 73% require evidence that that the employee caused or contributed to false or incorrect financial reporting”.
• A restatement isn’t the only reason companies are recouping incentives – 84% of studied companies also cited misconduct, (including violation of a company’s code of conduct or ethics policies and criminal conviction) as a reason for triggering recoupment.
• Newer forms of clawback policies are emerging – a common form including a trigger for excessive risk taking by executives. The existence of risk taking provisions varies greatly by industry. For example, in the banking industry, 70% of the studied companies have policies to recoup incentives based on excessive risk taking, while 0% of companies in the Pharma, Retail, Technology and Auto/Airlines industries had excessive risk triggers.
• 79% of companies reserved discretion to determine whether or not to enforce their clawback policies on a case-by-case basis.
• In 86% of companies, both cash and stock are subject to recovery under clawback policies (the remaining 14% of companies are split down the middle – either they recover only cash (7%) or only stock (7%)).
• 90% of companies may recoup awards regardless of whether the awards have vested. 10% recoup only vested awards.

With the SEC yet to release their rule making in this area (though we expect some action in this area sometime in 2014), companies continue to evolve their policies on their own – often based on shareholder input or other drivers. We’re certainly likely to see some additional trends emerge once the final rules have been adopted.

-Jennifer