Tackling New Clawback Rules

Among the many topics discussed at this year's NASPP Conference, I wanted to blog on one in particular - namely Say on Pay, and specifically the new provision under Dodd-Frank for listed companies to develop and implement a policy regarding clawbacks. Fortunately, due to the scheduling of rules, filers will not HAVE to deal with these changes - or those relating to reporting of the CEO to average employee salary ratio - in the 2011 proxy season.

There seems to be a lot of confusion on this topic, since many filers assume that since they already have a clawback provision in place that they are all set. In fact, a large proportion of filers are going to have to rewrite these provisions, which were likely written in response to Sarbane's Oxley or possibly TARP. The differences in the rules for SOX and Dodd-Frank are important to understand. 

Triggers remain for the most part the same, though SOX is triggers by misconduct while Dodd Frank can be triggered by any restatement due to material noncompliance with SEC laws. What can be clawed back also remains oriented around equity incentives, but the big differences come into play on whom is subject to clawback provisions and for how long. Previously, clawbacks were applied only to current and former CEOs and CFOs for the compensation paid in the 12 months following the financial misstatement. This has been broadened and applies to all executives for compensation that was paid during the three year period before the company is required to prepare the accounting misstatement.

For the first time, executives could be required to pay back compensation earned in situations in which they may not have had any responsibility. This then brings up a number of questions.  Who is included among "executive officers" and what is included in incentive compensation?  Will these changes be retroactive, and if so, for how far back? Is there any room for discretion and/or interpretation? What happens if the new company clawback conflicts with existing employment agreements, particularly for executives who have no part in financial reporting? Who enforces non-compliance, and how would it be enforced?

The biggest question for filers, though, may be how this change may impact the design of their incentive compensation plans to minimize the risk of a clawback occuring. This could be problematic at a time when there is an even greater push to emphasize performance-based "at risk" compensation.

Certainly, just rewriting clawbacks is not going to be the only thing that filers will be tackling as a result of the change. There will be ripples in employment contracts, performance metrics used in plan design, and lots of questions regarding the probability of loss in compensation due to circumstances beyond the control of the individual executive. 

Perhaps this is even more reason for CFOs to be looking for consideration of the extra challenges of their jobs in the upcoming year. CFOs, wondering how your compensation stacks up this year? Take a look at the CFO Magazine article published in October 2010 using data from Kenexa showing trends in CFO compensation. Do you deserve a raise?