The Advisors' Blog

As you may be able to tell, clawback policies are consuming a lot of my brain space right now. Listed companies will need to have a policy in place by December 1st of this year, which will apply to incentive-based compensation received by executive officers on or after the effective date of those rules, which is October 2, 2023.

As Dave blogged earlier this week on TheCorporateCounsel.net, while the requirements for the policy that are dictated by SEC Rule 10D-1 are very specific (and restrictive), the actual implementation of clawback provisions in response to those requirements is proving to be somewhat complex for listed companies. I blogged yesterday about state law contract considerations – and research also shows that, because the decisions that surround implementation of these policies could create unintended consequences down the road, you need to tread carefully.

This Equity Methods blog walks through “readiness steps” – focusing on these broad action items:

1. Educating key stakeholders (comp committee, executives, finance, legal, HR)

2. Updating (and creating new) policies

3. Documenting a playbook of actions to take in the event a clawback is required

On the step of policy creation, which is where most of us are living right now, the blog covers a few basic decision points (some of which Dave also discussed in his blog earlier this week). Here are some relevant excerpts:

– Single or Dual Policy – We anticipate most companies adopting a two-policy framework in which the Dodd-Frank-mandated clawback will sit next to a broader but more flexible (discretionary) clawback.

– Calculation Methodology – Although we expect the use of an event study to be the de facto standard, our advice is to not commit to a particular calculation methodology for stock price or TSR-based awards. Instead, we suggest drafting the clawback policy to state that the compensation committee will evaluate the facts and circumstances and select a methodology that, in its judgment, yields a reasonable estimate of the accounting restatement’s effect on the stock price or TSR metric.

– Enforcement Method – We think practices will evolve, so we suggest drafting the policy to confer flexibility. We have experience setting up web-based choice platforms and think it may improve the odds of success if participants have multiple repayment options.

The blog goes on to recommend producing “work papers” that sit outside of the policy and give you a playbook to guide decisions that will need to be made quickly if a restatement occurs – similar to what many companies do for cyber incidents and other sensitive events. Check out the chart in the blog for a starting point.

For even more color, Dave, Ron & Mark gave their take on clawback policies (and many other topics) during Tuesday’s webcast on this site. The audio archive for that program is available now – with the clawbacks discussion starting around the 90-minute mark – and the transcript will be posted in the next few weeks. This is also one of the many important areas on which we will be providing practical guidance at our “Proxy Disclosure & 20th Annual Executive Compensation Conference” – coming up virtually September 20th – 22nd. Register now to make sure you have the latest action items before you finalize your policy!

– Liz Dunshee