After years of anticipation from corporations, institutional investors and better-business advocates, the Securities & Exchange Commission adopted its final clawback rule this week requiring companies to recover erroneously awarded incentive-based compensation after making a financial restatement.
The new rule will force companies to craft policies aligned with the SEC’s standards — and that also goes for the many companies that have already established clawback policies — by requiring stock exchanges to add a requirement for clawback policies to their listing standards. Sources say the rule could ultimately impact compensation plan design, as well.
Under the rule, which was prompted by the Dodd-Frank Act, in the event of a restatement, companies will need to analyze whether they could have paid executives too much incentive-based compensation on the basis of the erroneous financials. If so, the companies would need to compel execs to give back the amount of pay that exceeds the amount they would have received under the correct financial calculations.
It also requires companies to disclose their clawback policies.
Now that the SEC has adopted its final rule, the stock exchanges will have to propose and then finalize their listing standards in accordance with the SEC’s requirements. The exchanges will have 90 days from publication of the SEC’s rule in the Federal Register to propose their standards, and one year from publication to finalize them. Following that, issuers will have 60 days from the finalization of the listing standards to adopt their own clawback policies.Agenda – SEC’s Clawback Rule Could Change Compensation Structures