Compensation Clawback Policies: SEC Proposes New Rules

With Securities and Exchange Commission (SEC) proposed rule changes regarding compensation clawback policies potentially leading to Nasdaq, the NYSE, and other national securities exchanges and associations adopting listing standards applicable to listed companies, the Executive Benefits Team at OneDigital recommends that listed companies plan for the review of existing incentive-based compensation arrangements and any other plans or agreements that are affected by incentive compensation, such as deferred compensation plans or supplemental executive retirement plans. The goals of such review would include determining whether there is an existing contractual right to recover compensation and to consider whether to modify the arrangements to permit recovery in the future.

The following article released earlier this month by Foley and Lardner looks at these proposed rule changes. Below is an excerpt from “SEC Proposes Rules on Compensation Clawback Policies,” written by Joshua A. Agen and Leigh C. Riley.

You can read the full article at Legal News: Employee Benefits & Executive Compensation

SEC Proposes Rules on Compensation Clawback Policies

On July 1, 2015, the Securities and Exchange Commission (SEC) proposed rules relating to compensation clawback policies. The rules, if adopted, would implement the requirements of Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd Frank) by directing national securities exchanges and associations, such as the NYSE and Nasdaq, to adopt listing standards that would require listed companies to develop and implement compensation clawback policies.

Under the proposed rules, listed companies would be required to have written compensation clawback policies that require the recoupment of certain incentive-based compensation received by current or former executive officers. The listing standards would also require companies to make certain disclosures about their clawback policies. The listing standards would generally apply to all issuers with a class of securities listed on a national securities exchange or association, including foreign private issuers, controlled companies, smaller reporting companies and emerging growth companies.

Executive Summary

• The proposed rules would require the clawback policy to be triggered by an accounting restatement required to correct an error that is material to previously issued financial statements
• The policy would apply to incentive-based compensation received by current or former executive officers during the three (3) fiscal years preceding the date on which the issuer is required to prepare the accounting restatement
• Incentive-based compensation subject to the clawback would include compensation received due to achievement of a goal based on accounting principles or on stock price or total stockholder return (TSR). Stock options that are granted, earned and vested based solely on continued employment would not be subject to the policy
• The amount of the recovery would be the excess of the amount of incentive-based compensation the executive officer actually received over the amount the executive officer would have received based on the restated numbers, determined on a pre-tax basis. Where the incentive compensation is based on stock price or TSR, reasonable estimates could be used to calculate the excess amount