Rules for Recouping Incentive Compensation Vary
One method companies have for punishing misconduct by executives is to recoup bonuses, stock options or other incentive programs. Though mandated by the Sarbanes-Oxley Act of 2002, the type of “clawbacks” used and the events triggering them vary both by company and by industry. Often, the rules regarding what counts as grounds for the recoupment of compensation may be more lax than shareholders realize.
An analysis by PwC of over 100 large U.S. public companies found the most common grounds for recouping compensation is false or incorrect financial reporting (92% of all companies). Approximately two-thirds of the companies require proof of an employee causing or contributing to false or incorrect financial statements. Though misstatements are potentially harmful to investors, PwC observed that “in many cases, the clawback is only triggered for a material restatement or the amount of the clawback is only the excess of the amount paid over the corrected payments after applying the restatement.”
The next largest trigger is violating a company’s ethics or conduct rules, being convicted of a criminal offense or other transgressions. About 84% of companies have this provision. Only 44% of companies have clawback provisions relating to fraud, however.
Less common provisions include breaking non-compete agreements (22%), misrepresentation of performance results to earn higher incentive payments (24%) and a general lack of supervision or oversight of subordinates (16%). Just 9% of companies can recoup compensation if financial statements were impacted through no fault of the employee, and only 8% can claw back compensation if performance targets or thresholds are not met.
PwC also found a general lack of ability for shareholder boards and compensation committees to use blanket discretion when deciding if a clawback event has occurred. Nearly 80% of companies allow for discretion on enforcing the clawback policies on a case-by-case basis, however. Many companies also allow flexibility in determining how much compensation should be recouped if a triggering event occurs.
The Dodd-Frank Act of 2010 required the Securities and Exchange Commission to write clawback rules, but as of press time, new rules had yet to be proposed.
Source: “Executive Compensation: Clawbacks,” 2013 Proxy Disclosure Study, PwC, April 2014.