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Wall Street Journal, July 25, 2010 article


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THEORY & PRACTICE   |   JULY 25, 2010

Law Sharpens 'Clawback' Rules for Improper Pay


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.

Under 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 PepsiCo Inc.


The clawback requirements could prove tricky to implement. 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


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