By Josh Feldman. Clawback provisions, referring to money or benefits that can be taken back as a result of special circumstances, are no new concept in the world of executive compensation. However, in a recent press release, the SEC proposed rules that would require companies to adopt and comply with a compensation recovery policy. This SEC proposal marks the final outstanding regulation required by the Dodd-Frank Act of 2010. Here is a bit of detail surrounding the proposed listing standards.
Recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error. The recovery would be required on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer’s responsibility for the erroneous financial statements.
Companies would be required to recover the amount of incentive-based compensation received by an executive officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement. For incentive-based compensation based on stock price or total shareholder return, companies could use a reasonable estimate of the effect of the restatement on the applicable measure to determine the amount to be recovered.
Under the proposed rules, a company would be subject to delisting if it does not adopt a compensation recovery policy that complies with the applicable listing standard, disclose the policy in accordance with Commission rules, or comply with the policy’s recovery provisions.
The provision currently applies to incentive-based compensation tied to accounting-related metrics, stock price, or total shareholder return. SEC Chair Mary Jo White stated, “The proposed rules would result in increased accountability and greater focus on the quality of financial reporting, which will benefit investors and the markets.” The proposal also includes a series of written requirements should the listed company be required to exercise its clawback provision and discussion of the impact that would have on future disclosures.
The current proposal is under a 60 day open comment period. You can view the SEC’s full July 1st press release and visit www.certent.com for more information on incentive based compensation. Does your organization have a clawback provision for equity awards? Comment below!