Compensation Advisory Partners LLC (“CAP”) appreciates the opportunity to comment on proposed rules for clawbacks. As a leading executive compensation consulting firm, we support sound corporate governance.

On July 1, 2015, the SEC proposed rules directing the stock exchanges to expand listing standards to require companies to adopt clawback policies. These clawback policies would require executive officers to pay back incentive compensation that was awarded in error under an accounting restatement. According to SEC Chair Mary Jo White, the express purpose of the rules are ‘increased accountability and greater focus on the quality of financial reporting, which will benefit investors and markets.” With these proposed rules, the SEC has now addressed all of the executive compensation governance reforms included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Where Do We Go From Here?

  • Most major companies have already implemented clawback policies
  • SEC proposal on clawbacks does not align with current market practice
    • Includes current and former executive officers
    • Triggered exclusively by an accounting restatement resulting from an error
    • Triggered regardless of whether executive has committed fraud or misconduct related to the accounting restatement
    • Includes a 3-year look-back period
    • Generally precludes board discretion
    • Accompanied by onerous disclosure rules
  • Assess your company’s current clawback policy against the proposed rules
  • Brief senior management and the board on the scope of the proposed rules
  • Await further developments after the public comment period ends and final rules are issued

Broad Scope

The SEC’s proposal amends the Securities Exchange Act of 1934 (the “Exchange Act”) by adding new Exchange Act Rule 10-D1. Other amendments would apply to filings by foreign private issuers and certain investment companies. As a result, the clawback rules will apply to virtually all listed issuers of equity securities, debt and preferred securities, including emerging growth companies, smaller reporting companies, foreign private issuers and controlled companies.

New Rule 10-D1

As proposed, an issuer would be subject to delisting if it fails to (1) adopt a clawback policy that complies with the new requirements, (2) disclose the policy and (3) comply with the policy to recover compensation under an accounting restatement. Under the proposal, clawback of incentive compensation would be required from current and former executive officers who received excess incentives during the three fiscal years prior to the date on which a company is required to prepare an accounting restatement to correct a material error. The clawback provision applies on a “no fault” basis, regardless of whether misconduct occurred and regardless of whether an individual had any responsibility for the error.

The amount subject to clawback would be the amount that exceeds the amount that the executive officer would have received if the incentive compensation had been determined using restated financial statements. The proposed rules direct companies to use reasonable estimates of the effect that an accounting restatement would have on stock price and total shareholder return to determine amounts subject to recovery.

Limits on Board Discretion

Under the proposal, the situations where a Board could elect not to pursue recovery are limited. The SEC specified situations where the direct expense related to enforcing recovery would exceed the amount recovered. However, even in these situations, the Board would have to go through the process of determining the amount subject to clawback and make an attempt at recovery before deciding not pursue enforcement of the recovery. In addition, foreign private issuers could elect not to comply when clawback would violate home country law.

Trigger for Recovery

New Rule 10-D1 would trigger a clawback in the event that the issuer prepares a restatement of previously issued financial statements to correct an error that was material. Note that the requirement to restate financial statements is enough to trigger the clawback provisions, allowing the SEC to avoid the potentially thorny question of what constitutes a material error. Under GAAP, an error may include mathematical mistakes, mistakes in the application of GAAP principles, or oversights or misuse of facts when the financial statements were prepared. The proposal indicates several types of changes to financial statement that are not error corrections and would not trigger clawback, including

  • Retrospective application of a change in accounting principle;
  • Retrospective revision to reportable segment information due to a change in the structure of the issuer’s organization;
  • Retrospective reclassification due to a discontinued operation;
  • Retrospective application of change in reporting entity, such as from a reorganization;
  • Retrospective adjustment to provisional amounts in connection with a prior business combination; and
  • Retrospective revision for stock splits.

3-Year Look-Back Period

The proposed clawback will apply to excess incentives during a 3-year period prior to the date on which the issuer is required to prepare an accounting restatement. The proposal defines this date as the earlier of:

  • The date the issuer’s board of directors, a committee of the board of directors, or the officer or officers of the issuer authorized to take such action if board action is not required, concludes , or reasonably should have concluded , that the issuer’s previously issued financial statements contain a material error; or
  • The date a court, regulator or other legally authorized body directs the issuer to restate its previously issued financial statements to correct a material error.

The SEC notes that the first proposed date would generally coincide with the filing of Form 8-K, but Form 8-K is not necessary for recovery. Further, the obligation to clawback does not depend on whether or when restated financial statements are filed.

Application to Executive Officers

The proposed clawback rules apply to current or former executive officers who received incentive compensation. Under the proposal, executive officer is defined as the issuer’s president, principal financial officer, principal accounting officer (or controller), any vice president to the issuer in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy-making function, or any other person who performs a similar policy-making functions for the issuer.

This proposed definition of executive officer is modeled on the definition used in Section 16, so it will apply to a reasonably large group of senior executives. The proposal also specifies that individuals who served as an executive officer at any time during the performance period for incentive compensation subject to recovery will be subject to clawback. This would include incentive compensation authorized before the individual becomes an executive officer and inducement awards granted in new hire situations.

Compensation Subject to Clawback

The SEC proposal contains a very broad definition of “incentive-based compensation” subject to clawback. As proposed, this would be defined as “any compensation that is granted, earned or vested based wholly or in part upon the attainment of any financial reporting measure.” The rules would also specify that “financial reporting measures” are measures determined and presented in accordance with the accounting principles used to prepare the issuer’s financial statements, any measures derived wholly or in part from such financial information and stock price and total shareholder return.

This definition wraps in accounting-based measures, as well as non-GAAP measures. Notably the SEC proposal includes stock price and total shareholder return. Although these are not accounting-based measures, the SEC included them because these measures are affected by accounting information and subject to current disclosure (i.e., stock performance graph and disclosure of high and low stock prices for each quarter within the two most recent fiscal year and any subsequent interim periods). Importantly, stock options and restricted stock that vest solely based on continued service are not subject to clawback.

The SEC acknowledges the complexities associated with trying to determine the amount of excess compensation related to the relationship between an accounting error and stock price. The SEC recognizes that complex analyses may be required. As a solution, the SEC suggests that issuers be permitted to make reasonable estimates and requires disclosure of these estimates.

The proposal includes examples of compensation that would be subject to clawback, as well as compensation that would be excluded:

Compensation Subject to Clawback

Compensation Excluded from Clawback

Non-equity incentive plan awards that are earned based wholly or in part on satisfying a financial reporting measure performance goal


Bonuses paid from a bonus pool, the size of which is determined based wholly or in part on satisfying a financial reporting measure performance goal

Bonuses paid solely at the discretion of the Compensation Committee or Board, not paid from a pool determined wholly or in part on satisfying a financial reporting measure goal

Restricted stock, RSUs, performance shares, stock options and SARS that are granted or become vested wholly or in part on satisfying a financial reporting measure performance goals

Bonuses paid on subjective standards (e.g., leadership) and/or completion of a specified employment period

Proceeds received upon the sale of shares acquired through an incentive plan that were granted of vested based wholly or in part on satisfying a financial reporting measure performance goal

Non-equity incentive plan awards earned solely upon satisfying one or more strategic measures (e.g., consummating a merger or divestiture) or operational measures (e.g., opening a specified number of stores, completion of a project, increase in market share)

Equity awards for which the grant is not contingent upon achieving any financial reporting measure performance goal and vesting is contingent solely upon completion of a specified employment period and/or attaining one or more non-financial reporting measures

Proposed Disclosure Requirements

Proposed new Rule 10D-1 would require disclosure of the issuer’s policy related to clawback of erroneously awarded compensation. The clawback policy would need to be filed as an exhibit to Form 10-K for listed U.S. issuers.

The proposal contains additional disclosure requirements that are extensive when a restatement was completed or an outstanding balance of excess incentive-based compensation relating to a prior restatement. In these instances, the proposed disclosure would include:

  • For each restatement, the date on which the listed issuer was required to prepare an accounting restatement, the aggregate amount of excess incentives and the aggregate amount that remains outstanding as the end of the most recent completed fiscal year;
  • The estimates used to determine the excess incentive compensation related to a stock price or total shareholder return measure;
  • The name of each person subject to clawback for whom the listed issuer decided not to pursue recovery, the amount forgone and a description of the reason the issuer decided not to pursue recovery; and
  • The name and amount due from each person from who, at the end of the last completed fiscal year, excess incentive-based compensation had been outstanding for 180 days or longer.

The proposed disclosure would be included as a separate item, not part of the CD&A. However, companies would have the option of providing the information in the CD&A to provide all information related to the clawback policy in one place.

The proposed rules also include amendments to Summary Compensation Table disclosure. Amounts previously reported would be reduced by the amount recovered by clawback with a footnote explanation. Finally, the required disclosure would be provided as interactive using XBRL block-text tagging.

Other Important Provisions

The proposed rules are incorporated in a 198 page filing. They are very detailed and complex. This article necessarily serves as a summary of the most important points that we see as being of general interest. But there are other details that shed light on the SEC’s thinking, as follows:

  • Incentive-based compensation recovery will apply to pre-tax amounts.
  • Clawback may occur simultaneously under new Rule 10D-1 and SOX Section 304. If an individual reimburses the Company under Section 304, a credit will be recorded for purposes of new Rule 10D-1.
  • Lack of compliance with a clawback policy threatens a company with delisting, depending on the stock exchange’s assessment of whether the company was making a good faith effort to clawback compensation.
  • Companies may not indemnify executive officers or former executive officers against the loss of erroneously awarded compensation.
  • If an executive purchases third-party insurance, companies would be prohibited from paying the premiums for this insurance.

Timing of New Rules

The SEC’s proposal calls for prompt implementation. The current comment period extends for 60 days. After final rules are adopted, the SEC is calling for the stock exchanges to file their proposed amended listing standards within 90 days. Following the effective date of the stock exchange listing standards, each listed company would be required to adopt a clawback policy within 60 days. Clawback would apply to all excess incentive-based compensation received for any fiscal year ending on or after the effective date of new Rule 10D-1. Similarly, disclosure requirements would become effective immediately on or after the date on which the stock exchange listing standards become effective.

The SEC recently updated its regulatory agenda, impacting select compensation-related rulemaking that resulted from the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). As part of the update, the deadline to issue final CEO Pay Ratio rules, final Hedging Disclosure rules, and proposed Compensation Clawback rules was pushed back to April 2016 (from October 2015).

  • Implication (Pay Ratio): if final rules are adopted in April 2016, companies with a December 31 fiscal year end are not expected to be required to comply with pay ratio rules/disclosure until publication of 2018 proxy statements
  • Implication (Hedging Disclosure): if final rules are adopted in April 2016, companies with a December 31 fiscal year end are not expected to be required to comply with disclosure rules until publication of 2017 proxy statements. However, if the rule is released early, by the end of 2015, disclosure requirements could still be effective for 2016 proxy statements
  • Implication (Compensation Clawback): No information regarding effective date(s) is currently available

These timeline changes reflect a new deadline, not the date rulemaking will be published, proposed or adopted.

We will provide additional updates as this issue continues to evolve.


  • Nearly all companies (94%) have adopted a clawback policy, even without SEC guidance on Dodd Frank requirements for clawbacks
  • Consistent with our past findings, the most common forms of compensation that are potentially subject to recoupment are prior year’s cash and stock incentives
  • Hedging policies are in place at most companies, with 95% disclosing a hedging policy (vs. 91% in 2013)
  • Pledging policies can vary in scope as companies, but 63% of companies have a policy of some type in place
  • Some companies ban all pledging (68%), while others require advance approval for pledged shares (20%) or only prohibit pledging of shares subject to stock ownership guidelines (12%)

Survey Sample

Compensation Advisory Partners (“CAP”) reviewed 2014 proxy disclosures at a sample of 100 companies among the Fortune 500 representing nine industry groups. Industry groups included: Automotive, Consumer Goods, Financial Services, Health Care, Insurance, Manufacturing, Pharmaceutical, Retail, and Technology. For the companies studied, the median revenue size and market capitalization was $32B and $52B, respectively. The median 2013 total shareholder return (TSR // change in stock price plus dividends) was 43%.


Although companies are still waiting for SEC guidance on Dodd Frank, many have already implemented clawback policies on their own. Dodd Frank requires a broader definition of clawback compared to Section 304 of SOX, which applies to CEOs and CFOs.

Similar to our findings last year, 94% of companies we studied have some form of clawback policy, compared to 86% and 80% in 2011 and 2010, respectively. Because the majority of companies have now adopted robust clawback policies, the number of changes made in 2013 as compared to prior years has decreased. In 2013, there were no companies that adopted a new clawback policy, while only 7 modified existing provisions. The most common changes made were to expand the compensation subject to clawbacks and expand the triggers for clawbacks beyond financial restatements.

As in prior years, a financial restatement (87%) and misconduct (77%) are the most common triggers for a clawback. For the first time in our study, fraud (50%) will trigger a clawback for a majority of the companies analyzed.

Under nearly all policies, it is most common for companies to include the ability to recoup compensation previously granted. Some companies will also have clawback provisions in place that allow them to either adjust the amounts of future incentive compensation given or cancel any outstanding performance-based stock or cash awards.

Compensation Subject to Clawback

No. of Cos.

% of Cos.

No. of Cos.

% of Cos.

No. of Cos.

% of Cos.

No. of Cos.

% of Cos.

Prior LTI









Prior Annual Incentive









Future Annual Incentive









Future LTI









Note: Percentages add up to greater than 100% due to multiple responses

Coverage extends to all NEOs in 97% of companies, which is higher than our findings in 2010, 2011, and 2012. Interestingly, many companies extend coverage beyond the NEO level, with 50% of companies having clawback policies in place for all Section 16 officers. Companies are not required to disclose the level of program detail in the proxy, but we expect most program provisions are more broad-based.

Similar to our findings in prior years, less than a quarter of companies indicate the length of the look-back period during which compensation can be recovered. Of the 21 companies that disclosed a time frame, the most common is 1 year (52% of companies) from date of restatement, followed by 3 years (38% of companies).

As we wait for the SEC to propose final rules, there are several practical challenges to clawing back compensation, such as how to clawback equity gains, how to claw back from former employees and the tax implications of clawbacks.

Hedging and Pledging

With increasing scrutiny from shareholder services such as ISS, hedging and pledging policies have become more significant governance / shareholder issues. ISS has taken the stance that any hedging and significant pledging by insiders to be indicative of a potential failure of risk oversight on behalf of a company’s Board. The Board’s policy regarding these practices is most commonly reflected in the company’s insider trading policy, but it can be addressed through Board resolutions or a stand-alone policy.

Hedging is viewed as a poor practice as it insulates executives from stock price movement and reduces alignment with shareholders. Pledging, in modest amounts, may not be viewed as negatively, yet can become problematic if there were a significant decline in stock price which necessitated a sale of shares from a senior executive. Given the potential negative perception of insider hedging and pledging, as well as the pending Dodd Frank guidance, companies have begun to adopt policies to limit these provisions. Anti-hedging and pledging policies are in place at 95% and 63% of companies studied, respectively; 63% of companies have both policies in place and 32% only have a hedging policy.

Hedging / Pledging Policies

No. of Cos.

% of Cos. n=100

No. of Cos.

% of Cos.

Hedging Policy





Pledging Policy










Hedging Only





Note: Percentages add up to greater than 100% due to multiple responses

An example of typical disclosure of a prohibition on hedging/pledging is reflected in 3M’s proxy disclosure:

“The Company’s stock trading policies prohibit directors and the Company’s executive officers from (i) purchasing any financial instrument that is designed to hedge or offset any decrease in the market value of the Company’s common stock, including prepaid variable forward contracts, equity swaps, collars and exchange funds; (ii) engaging in short sales related to the Company’s common stock; (iii) placing standing orders; (iv) maintaining margin accounts; and (v) pledging 3M securities as collateral for a loan.”

Our analysis of pledging policies was broken down further to show that there are variations to prohibit pledging. A company can ban all pledging (68% of companies with anti-pledging policies), prohibit pledging of shares unless an employee receives advance approval (20%) or prohibit any shares subject to stock ownership guidelines to be pledged (12%).

An example of the latter two anti-pledging policies can be found in Best Buy and ACE’s proxy statements, respectively:

Best Buy: “…our executive officers and Board members are prohibited from holding Company securities in a margin account or pledging Company securities as collateral for a loan, unless approved in advance by the Compensation Committee.”

ACE: “The Company prohibits NEOs from pledging shares that are held in satisfaction of the share ownership guidelines.”

Pledging was not addressed in Dodd-Frank per se, and we do not know what the SEC’s position will be in the future. We do however expect more companies to adopt pledging policies going forward given ISS’ 2012 policy statement that identified pledging of company stock by executives as a poor practice.


We continue to see companies stay ahead of the curve and track “best practices” in order to satisfy shareholders and proxy advisory firms. This results in reevaluations of company pay and governance practices, and as our research shows, continued modification of clawback policies, and adoption of hedging and pledging policies. While formal guidelines have not been given to date, companies are adopting these policies as good governance, regardless of any final SEC guidance.

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