A Plain English Guide to the SECs Compensation Clawback Rules


​As accounting restatements occur relatively infrequently, and the severity is often modest, the proposed “clawback” rules represent more of a "check the box" compliance activity than a real enforcement threat.

When to comply?
Technically, adopting a recovery policy is not necessary until 60 days after the exchanges’ listing standards become effective. However, the “clawback” rules must be enforced if there is a restatement during a company’s fiscal year in which the SEC adopts its final rules. Therefore, we recommend that our client's compensation committees be ready to adopt the sample Compensation Clawback Policy set forth below shortly after the SEC finalizes its rules. This could happen as early as Q4 2015 but is more likely to occur in 2016.

What compensation is covered?
Only performance-based cash and equity compensation that is granted, earned or vested based in whole or in part on the attainment of any financial reporting measure is covered (“Covered Compensation”). Salaries, discretionary cash bonuses and equity awards that vest solely on the passage of time are not covered.

What executives are covered?
The rules apply to all current and former executive officers, whether or not an officer is at fault, who receive payments of Covered Compensation during the three completed fiscal years (the “Covered Period”) preceding the date the company is required to prepare the accounting restatement (the “Covered Executives”). For example, if a calendar year company concludes in November 2018 that a restatement is required for 2017 and files it in January 2019, the Covered Period will be 2015, 2016 and 2017.

What must be recovered?
The company must recover from each Covered Executive that portion of Covered Compensation that would not have been paid or earned if the financial statements issued during the Covered Period had been properly prepared. This includes Covered Compensation to the extent the restatement affects stock price.

How is it recovered?
Direct repayment of the affected Covered Compensation on a pre-tax basis is required; however, when that is not practicable, companies can cancel unvested equity and deferred compensation. To facilitate the enforcement of such measures we recommend that companies build into bonus participation agreements, performance share and unit grant agreements and deferrals of compensation, the Covered Executives’ acknowledgement and consent to such actions. Recovery is not required if the direct costs of seeking recovery would exceed the recoverable amount or if recovery would violate the company’s home country laws.

When is a restatement required?
A restatement is generally required when the company concludes, or reasonably should have concluded, that previously issued financial statements contain a material error. Currently, companies must file a Form 8-K when they conclude they have filed erroneous financial statements that should no longer be relied upon.

Sample Compensation Clawback Policy:
The compensation committee will recover from any current or former executive officer, regardless of fault, that portion of performance-based compensation based on financial information required to be reported under the securities laws that would not have been paid in the three completed fiscal years preceding the  year(s) in which an accounting restatement is required to be filed to correct a material error. This policy will be enforced and appropriate proxy disclosures and exhibit filings will be made in accordance with the SEC's clawback rules and our exchange listing standards.