As of Dec. 1, publicly traded companies have been required to enact policies that adhere to recent Securities and Exchange Commission (SEC) rulings concerning the reclaiming of unrightfully awarded incentive-based compensation for executives. Companies are now faced with the dilemma of what to do with the compensation reclaiming policies they have held for years.
The SEC’s new rules mandate that publicly traded companies reclaim incentive-based compensation wrongly awarded to an executive officer if the award was due to the company’s material noncompliance with any financial reporting requirement. In simpler terms, if there are accounting errors.
The SEC rules have brought a greater level of certainty about how a compliant policy should be formed, embodying rules implemented as part of the Dodd-Frank Act of 2010. Due to the reality of the lengthy waiting period since its conception, many public companies have already acted on rules on an individual level, resulting in policies that significantly differ from the new one, especially concerning the compensation covered and triggering events.
Companies in numerous cases have maintained existing clawback policies and have implemented a new, second policy to meet the SEC requirements. However, with some careful planning, companies can maintain both policies and have them coexist productively.
There is no inherent operational or documentation problem with having two compensation clawback policies that overlap or classify different aspects of a company’s overall compensation scheme. Although an SEC-compliant clawback policy may have a differing scope than a company’s original policy— different subsets of executives and employees subject to the policy and different enforcement mechanisms— two separate policies can be aligned by carefully drafting and including coordinating provisions within the documents. For example, the SEC-compliant policy could have a ruling stating that it will override any other policy and will exclusively apply under certain circumstances.
Many corporate clawback policies created before the new SEC rules came into effect have different objectives and mechanisms than the SEC-compliant clawback policies. Such policies might also allow the board or the compensation committee discretion as to whether and how to enforce the policy in different scenarios. It seems most unlikely that after the SEC’s issuance of requirements for creating a compliant policy, the reasons for having a pre-existing policy ceased. On the contrary, one might reasonably expect that the objectives of existing clawback policies, which extend beyond SEC-compliant rules, will remain desirable.
As such, older clawback policies will likely continue to be a relevant and useful part of a company’s overall executive compensation scheme. The main question of what to do with a two-policy scenario seems to be how to document and operationalize the existing policy effectively alongside the SEC’s terms. For instance, discretionary authority provided by the board or compensation committee in older policies can be explicitly bestowed, clarified, or extended to allow flexibility so the older policy aligns more easily with the new mandated SEC compliant policy.
With such significant changes from the SEC, understanding how these new rules will affect company policy and practice is of paramount importance. Companies should constantly reassess and alter their policies as necessary, ensuring compliance with the new rules while also maintaining their unique needs and circumstances.