In 'Clawback' Policies, Triggering Actions Vary

Companies are taking a variety of approaches

By Stephen Miller, CEBS April 23, 2014

When providing employees with bonuses, stock options, or other incentive awards, companies often establish provisions that allow them to "clawback" or recoup all or a portion of the award. The aim is to deter certain actions or behaviors, such as improper conduct or excessive risk taking that leads to a drop in company value.

Often put in place voluntarily, the Sarbanes-Oxley Act of 2002 requires public companies to claw back CEO and CFO awards earned in the one-year period prior to a financial restatement as a result of misconduct. Subsequently, the Dodd-Frank Act of 2010, after final rulemaking by the Securities and Exchange Commission (SEC), will require all public companies to implement more strict clawbacks, including clawbacks from executive officers (current or former) of any erroneously awarded compensation in the three-year period prior to a restatement, without consideration of misconduct.

Clawback policies have been receiving more attention in recent years, due in large measure to the 2008 financial crisis, blamed in part on excessive risk-taking by executives at financial firms. But in the absence of final SEC guidance, companies are taking a variety of approaches with their clawback policies, according to a new report by consultancy PricewaterhouseCoopers (PwC), "Executive Compensation: Clawbacks—2013 Proxy Disclosure Study.” The analysis looks at 2009 through 2012 year-end proxy disclosures for 100 large U.S. companies relative to their compensation recoupment policies.

Awards Subject to Clawbacks

Awards subject to recoupment included equity (stock) incentives, cash bonuses, or a combination of both. The vast majority of companies studied (86 percent) may recover both cash and stock awards if clawback policies are triggered, while 7 percent only recover cash incentives and the remaining 7 percent only recover equity awards.

"Notwithstanding the lack of final rules on the Dodd-Frank clawbacks, we have seen many companies developing new types of clawbacks over the last few years," according to the report's authors, PwC partner Ken Stoler and director Nicole Berman.

Clawback Triggers

Of the 100 companies in the study, most had policies to recoup compensation following a restatement of financial results, and among those companies, most require evidence that the employee caused or contributed to false or incorrect financial reporting—although a minority require repayment in the event of a restatement without personal accountability.

In many cases, the clawback is only triggered for a "material" or significant restatement, and many companies also limit the clawback to the excess of the amount paid over the corrected incentive payments after applying the restatement.

Another prevalent reason for recoupment of incentives was misconduct, which includes breaking a company’s code of conduct or ethics policies, being convicted of a criminal offense, or other transgressions.

The chart below reflects the percentage of companies that disclosed a particular clawback trigger (many companies have more than one trigger).

Top Clawback Triggers

(Percent of respondents that use these developments to initiate clawbacks)

Misconduct (violating company policies)


Restatement of financial results due to employee's direct involvement


Fraud (criminal activity)


Restatement without direct employee involvement


Misrepresentation of performance results


Discretionary Features

Of the 100 companies studied:

  • 79 percent gave discretion to the board or compensation committee to determine whether or not to enforce their clawback policies on a case-by-case basis.
  • 14 percent mandated the recovery of awards at the discovery of any clawback triggering behaviors or actions.
  • 7 percent reserved discretion to determine whether or not to enforce their clawback policies for certain clawback triggers or awards and mandated the recovery of awards for others.

Accounting Issues

Many companies have modified their clawback policies since enactment of Sarbanes-Oxley and Dodd-Frank, and others have indicated that their clawback policies will likely change once the SEC issues its clawback rules. "As companies consider adding or changing clawback policies, they need to consider potential accounting implications," according to the report.

Under the existing accounting rules, a “traditional” clawback feature does not impact the equity award’s value and stock expense pattern. If the clawback were invoked, accounting recognition would only be needed at that time to reflect the recoupment of the cash or shares.

"As companies look to develop new types of clawbacks to address a variety of risks, some may wish to add performance metrics that affect vesting or retention of the award (e.g., an employee is required to return outstanding awards if there is a loss on their trading desk or in their division)," the report notes. "Depending on how they are structured, these performance requirements may not be considered clawbacks at all, but instead represent performance conditions of the award. In that case, the accounting implications could be significant.”

Another consideration is whether the clawback includes flexibility or discretion, such as determining when a clawback has been triggered and the amount to be recouped. According to report authors Stoler and Berman, depending on how discretion clauses in the clawback policy are structured, "firms could end up with mark-to-market accounting treatment for equity awards," pricing them at the most current market valuation. "This is a complex area and significant judgment, so careful consideration is required when putting in these types of provisions in place," they told SHRM Online in an e-mail.

Look-Back Periods

Recoupment policies may apply to awards granted during a particular period of time prior to the clawback triggering event. Of the studied companies, the report found that only 42 percent disclosed any look-back periods. Of the companies describing a look-back period, the most common look-back periods were in the range of one to three years. However, 17 percent of the companies indicated they have no limit on the length of the look-back period.

Stephen Miller, CEBS, is an online editor/manager for SHRM.



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