SEC Proposed Clawback Rule Includes Several Center On Exec Comp Recommendations

Executive Pay Plan Design

On July 1, a divided SEC approved proposed rules implementing the Dodd-Frank no-fault clawback requirement on a 3 to 2 party-line vote, citing comments by our Center On Executive Compensation in numerous instances on issues such as allowing Board discretion in how to recoup funds.  The proposed rules would set the parameters for stock exchange listing standards that would require companies to adopt a clawback policy providing for the recoupment from all current and former executive officers of incentive compensation tied to accounting-related metrics, stock price or total shareholder return in the event of a material restatement that would have resulted in lower incentive compensation.  The standards would apply regardless of whether the executives are at fault.  The recoupment applies to incentive compensation received within three years of determining a material restatement.  Although there is room for improvement, the proposed rule includes a practical approach to certain issues including:

• Time-vested restricted stock and stock options are excluded from the definition of "incentive compensation" unless the amount earned from the vehicles is earned or vested based upon financial metrics or total shareholder return.
• Companies appear to have discretion in determining how to recoup compensation (e.g., from unvested restricted stock) within certain parameters.
• A company is permitted not to recoup compensation if the cost of doing so exceeds the amount to be recouped or is determined to violate the laws of another country.

A full explanation of the rule and its new disclosure requirements can be found in a new Center fact sheet.  Starting in 2010, the Center filed comments with the Commission and, along with Subscribers, held several meetings to provide its suggestions on a principles-based and practical implementation of the clawback rule.  The rule still raises several complexities as to how to recoup compensation from former executive officers and how to calculate the impact of a recoupment on stock price.  The Center will file comments on the proposed rule, which is expected to be published shortly in the Federal Register.