What is a Clawback Provision?
A clawback provision allows a company to recover compensation that was previously paid out but should not have been. These provisions are triggered by specific events that warrant the recovery of some or all of the incentive compensation delivered to covered employees within a defined look-back period. Such events typically include financial restatements, misconduct, or fraud.
Key Elements in Designing a Clawback Provision
When establishing a clawback provision, several important factors must be considered:
1. Triggering Events
The events that trigger a clawback are fundamental to its design. The most common triggering events for Canadian companies include financial restatements caused by misconduct, a practice often referred to as a Sarbanes-Oxley style clawback. Over time, best practices have evolved to include financial restatements alone, regardless of whether misconduct occurred. This approach is known as a Dodd-Frank style clawback.
An emerging trend is to expand the range of triggering events to include issues like reputational harm, risk management failures, and operational failures, providing a broader scope for potential clawbacks.
2. Covered Employees
Determining which employees are subject to the clawback is another critical decision. Typically, covered employees include the CEO and CFO at a minimum. However, the coverage can extend to the entire C-suite or even deeper into the organization, encompassing financial, risk, and legal teams.
3. Length of the Look-Back Period
The look-back period defines how far back the company can reach to recover compensation. The standard look-back period is commonly three years, providing a reasonable timeframe to identify and address issues warranting a clawback.
Recent Developments in Clawback Provisions
A significant recent development is the adoption of a new rule by the SEC. This rule mandates that all companies listed on the NYSE or NASDAQ, including those dual-listed in Canada, must implement and disclose a clawback policy that allows for the recoupment of compensation even in the event of a no-fault restatement. This rule underscores the importance of robust clawback policies in ensuring responsible compensation practices.
The Importance of Clawback Policies
A well-designed clawback policy is a vital element of effective compensation governance. It ensures that companies can maintain integrity and accountability in their compensation programs. At Hugessen Consulting, we work with clients across various industries to develop and implement thoughtful governance frameworks for their compensation programs, including comprehensive clawback policies.
For more information on how we can assist you with your compensation governance needs, please contact us at Hugessen Consulting.