The Center recently filed supplemental comments with the SEC on the reopening of the compensation clawback rules it proposed in 2015.
The Center’s comments build on our last comments on this issue in 2015 to provide updated data and supplemental statements reflecting the best practice of companies voluntarily establishing clawback policies as well as when and how clawbacks are enforced. Specifically, the Center reiterated and expanded on the following recommendations in its comments:
- Boards need discretionary authority to determine if a clawback is a worthwhile use of shareholder resources. The Center’s comments recommend that the clawback requirement provide an appropriate level of discretion to ensure boards can act in a manner that effectuates the intent of the regulation. Companies should have the flexibility to utilize the most efficient method to claw back compensation and determine the impact of a material restatement on relative Total Shareholder Return (TSR) metrics, and potentially non-financial metrics such as human capital management, diversity, equity, and inclusion, or metrics tied to climate risk reduction.
- Remove the “reasonably should have concluded” standard in determining the look back period. The Center notes that a “reasonably should have concluded” standard will carry uncertainty and excessive legal risk. The Center commended the Commission for offering clear guidance that would remove ambiguity about the determination of a clawback “date.”
- Current practices of voluntary clawback policies and the use of performance-based incentive compensation. The Center highlighted that companies have largely adopted the practice of implementing voluntary clawback policies and the proportion of performance-based pay has increased. However, not all performance-based pay is predicated on financial metrics; it is important that boards have the flexibility to determine a good faith standard for the impact of a restatement on non-financial metrics.
