A far-reaching provision in the new financial-overhaul law will force U.S.
public companies to get tougher about making top executives repay
improperly awarded incentive compensation, pay specialists say.
the legislation signed July 21, the Securities and Exchange Commission
must order all companies to adopt so-called clawback policies. The
provision requires businesses to recoup as many as three years of
ill-gotten pay from current and former executive officers after a material
financial restatement—even if the executive wasn't to blame.
Many public companies currently lack clawback policies. Those with them
generally fall short of the law's requirements, particularly by letting
boards decide whether to retrieve pay, seeking repayment only when the
executive is at fault or not targeting former executives.
Only about 17% of 3,680 companies have disclosed clawback policies that
at least cover senior management, up from a handful in 2005, according to
proxy advisers ISS. The policies are more prevalent among bigger
businesses. Nearly three-fourths of Fortune 100 companies had such rules
in 2009, up from about 18% in 2006, reports Equilar, an
executive-compensation advisory firm.
"Every company with a clawback policy will have to revamp it—and
enforce it," says James D. C. Barrall, head of the
compensation-and-benefits practice for Latham & Watkins LLP.
The SEC still has to formulate its clawback rules; the law doesn't set
a timeline. SEC spokesman John Heine says the commission will propose
rules after receiving staff recommendations.
Some businesses say they plan to sharpen their clawback policies before
the SEC acts.
Arthur C. Martinez, a member of five public-company boards, says
they're already mulling how to bolster clawbacks that "don't go far
enough." He expects necessary changes will occur this year but declines to
be more specific.
"Smart boards would be well advised to get ahead of the curve," adds
Mr. Martinez, a former chief executive of Sears, Roebuck & Co. He runs
board compensation committees at
American International Group Inc.,
Liz Claiborne Inc. and
The clawback requirements could prove tricky to
Sysco Corp. adopted a clawback policy in 2009 that affects annual
bonuses for about 175 top managers and doesn't exclude former officers,
according to Mark Palmer, a spokesman for the food distributor. But
directors don't try to recoup stock options after a restatement, as the
new law requires.
John M. Cassaday, chairman of Sysco's pay panel, says the board thought
it would be too difficult to determine how much of options' value stemmed
from the misstated financial results. "How do you identify that portion of
the award that was attributable to the false result?" Mr. Cassaday asks.
On Aug. 26, his committee is to discuss whether to tighten Sysco's
clawback policy before the SEC rules appear.
More boards may decide to stretch out top officers' bonus payments, so
that more of the money would remain after a restatement. "Within three
years, 40% of public companies will have some form of deferral mechanism
in their bonuses"—compared with about 5% today, predicts David Wise, an
executive-compensation principal at consultants Hay Group.
The pay panel at
Northrop Grumman Corp. previously rejected bonus deferrals, recollects
Bruce Gordon, a member. But with the new clawback mandate, he says, "I am
sure we will take another look."
Still, some companies without clawbacks aren't rushing to adopt them.
Flowserve Corp. directors have taken "a wait-and-see attitude until we
see what's required of us" by the SEC rules, explains Kevin E. Sheehan, a
pay- panel member.
The valve and pump producer restated results for 2002, 2003 and the
first quarter of 2004. Flowserve didn't give top officers long-term
bonuses during those years, but did pay annual ones in 2002 and 2004, Mr.
Sheehan says. But he adds that no clawbacks would have occurred if the new
law existed then because "the earnings restatements were not material."
Write to Joann S. Lublin at