The Advisors' Blog

Do you have a process in place for deploying your new clawback policy in the unfortunate event of a restatement? It may be useful to think through that in advance. But right now, the only thing that people seem to be sure about is that it is going to be a complex exercise to calculate and recover excess incentives. This Barnes & Thornburg blog walks through a hypothetical to help illustrate the types of issues that may arise. Here it is:

John Smith is the chief executive officer (CEO) of Company X, whose equity securities are listed on NASDAQ, and he’s held this role since Jan. 1, 2010. In February 2021, the Board of Company X approved a compensation package for the CEO that included a performance-based equity incentive award for the Jan. 1, 2021, through Dec. 31, 2023 performance period. The target performance-based equity incentive award was based on 150 percent of base salary, which equaled 11,000 shares for the CEO. The payout opportunity equaled 0 percent (minimum), 100 percent (target), and 200 percent (maximum), with the growth in earnings per share (EPS) compared to the growth in peer companies’ EPS during the same period. Each named executive officer (NEO), including the CEO, was entitled to earn the performance shares at the end of the performance period depending on attainment level satisfied in respect of such EPS performance targets.

The Compensation Committee met in February 2024 to review the extent to which the CEO earned the 2021 equity incentive award. During the 2021-2023 performance period, the Compensation Committee analyzed the GAAP EPS growth over the performance period and using previously established payout matrix determined that the CEO was entitled to a payout of 200 percent of the target award. As a result, the CEO was awarded 22,000 shares in February 2024.

The 10-K was filed in late February 2024. In April 2024, the accounting team, working with its external auditor, discovered an accounting issue. After an investigation into the issue, the Audit Committee determined that its financial statements for 2022 and 2023 would need to be restated via a big R” restatement. (A “big R” restatement requires the issuer to file an Item 4.02 Form 8-K and to amend its filings promptly to restate the previously issued financial statements. In contrast, a “little r” restatement generally does not trigger an Item 4.02 Form 8-K, and an issuer may make any corrections the next time the registrant files the prior year financial statements.)

The restatement resulted in a decline in GAAP EPS for both 2022 and 2023. A 10-K/A was filed in May 2024 to restate the financial statements for the fiscal years ended Dec. 31, 2022 and 2023. The restated GAAP EPS amounts meant that the CEO was only entitled to 100 percent of the 2021-2023 target award, not 200 percent.

Will the compensation committee be required to claw back the award? Check out the blog for the answer…

– Liz Dunshee