The Advisors' Blog

– Liz Dunshee

Yesterday, I blogged about why you might want to have a clawback policy in place – maybe one that’s even broader than what would be required under Dodd-Frank. I recognize, though, that this might be a hard sell at many companies. The policies can be difficult to implement and can hamper recruitment efforts. This Shearman & Sterling blog suggests a compromise: the “quasi-clawback,” which means forfeiture of amounts that haven’t been earned – or that have been earned, but not paid. According to the blog, here are a few ways to go about that:

1. Forfeiture of unvested incentive based compensation. Compensation committees should consider retaining the discretion to reduce or eliminate target amounts of unearned incentive compensation upon uncovering behavior by an employee warranting such reduction or elimination.

2. Deferred payment of earned incentive-based compensation. Once performance-based compensation has been earned (i.e., the targets have been achieved), consider delaying payment for a period of time to ensure there was no inappropriate risk-taking in earning the compensation. Upon discovery, the compensation can be forfeited without the need for a clawback.

3. Forfeiture of non-qualified deferred compensation. Although Section 409A of the tax code prohibits the use of non-qualified deferred compensation to offset current obligations, forcing a forfeiture of otherwise vested but deferred compensation can be utilized as a form of punishment for so-called “bad actors.” This type of provision may be the most troubling from a recruitment standpoint as it places a portion of retirement savings at risk.