United States: The SEC Proposes Rules To Require Clawback Of Erroneously Awarded Incentive-Based Compensation

Last Updated: July 28 2015
Article by Robert B. Murphy and Mark Metz

Clawback (n.) /ˈklô,bak/: to get back by strenuous or forceful means

The SEC has proposed rules directing national securities exchanges and associations to establish listing standards requiring companies to adopt policies that call for current or former executive officers to pay back incentive-based compensation received within three years prior to an accounting restatement in excess of what they would have received based on the restatement. This rule proposal is the last of the executive compensation rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Congress first began to address the clawback of incentive compensation received by senior executives prior to a restatement more than 13 years ago in the Sarbanes-Oxley Act of 2002. Section 304 provides that the CEO and CFO of a public company must reimburse the company for incentive-based or equity-based compensation if the company is required to prepare an accounting restatement due to material noncompliance by the issuer as a result of individual misconduct. The SOX clawback provision applies to compensation received during the 12-month period following the filing of the misstated financials. The Dodd-Frank Act and the SEC's proposed rules would broaden the scope of the SOX clawback provisions in several respects.

Which companies will be required to adopt clawback policies?

With limited exceptions, all companies with securities listed on a national securities exchange or the interdealer quotation system of a national securities association will need to implement a compliant clawback policy. Under proposed Rule 10D-1, each national securities exchange and national securities association will be required to adopt a listing requirement applicable to every listed company. The exchange or association would have to delist and prohibit the original listing of any security of a company that does not:

  • adopt a clawback policy that satisfies the applicable listing standard;
  • disclose information about the clawback policy in accordance with SEC rules; and
  • comply with the clawback policy's recovery provisions.

The exchanges and associations will be free to adopt listing standards with requirements that are more extensive than those of proposed Rule 10D-1, and listed companies may adopt more extensive policies than those called for by the revised listing standards.

Who must be covered by the clawback policy?

As proposed, the clawback policy would cover any individual who served as an executive officer at any time during the applicable performance period affected by the accounting restatement. The proposed rules include a definition of an "executive officer" that is modeled on the definition of "officer" for purposes of Section 16 of the Securities Exchange Act of 1934. As such, the definition includes a company's president, principal financial officer, principal accounting officer, any vice-president in charge of a principal business unit, division or function, and any other person who performs policy-making functions for the company.

What compensation must be clawed back?

At a minimum, the policy must state that, in the event of a financial restatement due to material noncompliance with the financial reporting requirements of the securities laws, any person who served as an executive officer during the preceding three-year period and received incentive-based compensation for that period must pay back any amount in excess of what the executive would have received if the amount were determined under the restated financial statements. The determination of excess compensation is calculated without regard to the tax impact.

"Incentive-based compensation" is defined to mean any compensation that is granted, earned or vested based wholly or in part on the attainment of a financial reporting measure. Financial reporting measures are those based on the accounting principles used in preparing the company's financial statements (such as revenue), or any measures derived wholly or in part from such financial information (such as same store sales and various non-GAAP financial measures) and need not be presented within the financial statements or an SEC filing. Even salary increases based on the attainment of a financial reporting measure would be subject to recovery under the required clawback policy. For incentive-based compensation based on stock price or total shareholder return, companies would be permitted to use a reasonable estimate of the effect of the restatement on the relevant measure when determining the amount that should be recovered. Salary increases, bonuses and other compensation awarded upon satisfaction of subjective standards or contingent solely upon the occurrence of certain non-financial events (such as granting a certain number of licenses or obtaining regulatory approval of a new product) would not be subject to the clawback requirements.

Companies would have discretion under the proposed rule not to recover the excess incentive-based compensation received by executive officers if the direct expense of enforcing recovery would exceed the amount to be recovered and the company's compensation committee makes a determination that recovery would be impracticable. Before concluding that recovery would be impracticable, however, a company must make a reasonable attempt to recover the incentive-based compensation and must document its attempts to recover. The company also would be required to disclose in its annual meeting proxy statement why it determined not to pursue recovery and submit its recovery documentation to the applicable securities exchange or association. Companies would also be able to forego recovery where it would violate home country law and they obtain a legal opinion to that effect.

Will the clawback policy apply even if the restatement was due to an innocent mistake?

Yes. Unlike the SOX clawback provision, the proposed rule (consistent with the Dodd-Frank Act provision) mandates that the clawback policy must apply on a "no-fault" basis to recover "any compensation in excess of what would have been paid to the executive officer had correct accounting procedures been followed." The proposed rule further states that any accounting error that is material to previously issued financial statements constitutes "material noncompliance" by the company with a financial reporting requirement. Accordingly, in the event a company is required to prepare a restatement merely to correct an error that is material to previously issued financial statements, the obligation to prepare the restatement would trigger application of the clawback policy.

What period would be covered by the clawback?

The proposed rule would require clawback of incentive-based compensation received for the three completed fiscal years immediately preceding the date that the company is required to prepare an accounting restatement for any periods that end on or after the effective date of the proposed rule, regardless of when the compensation is actually paid. This restatement date is defined as the earlier to occur of: (1) the date the company concludes, or reasonably should have concluded, that its previously issued financial statements contain a material error; or (2) the date a regulatory body directs the company to restate its previously issued financial statements to correct a material error.

For example, using the proposed recovery period trigger and a 2015 effective date, if a calendar year company concludes in November 2018 that a restatement is required and files the restated financial statements in January 2019, its clawback policy would require the company to recover all erroneously awarded incentive-based compensation that is granted, earned or vested by the executive officers and former executive officers in 2015, 2016 and 2017.

What must be disclosed?

As proposed, the rules require each listed company to adopt a compensation recovery policy and to file that policy as an exhibit to the company's annual report on Form 10-K. If a clawback is triggered, a company would be required to make certain disclosures under new Item 402(w) of Regulation S-K in those filings where executive compensation disclosure is required pursuant to Item 402, including annual reports on Form 10-K, the annual meeting proxy statement and any other proxy or consent solicitation materials that require executive compensation information. The proposed rule amendments would also require a company to adjust the compensation amounts included in its Summary Compensation Table for the fiscal years in which the amounts recovered were initially reported, with those amounts identified by footnote.

Under the proposed rules, required proxy statement disclosure when a compensation clawback has been triggered would include:

  • the date the company was required to prepare the accounting restatement;
  • the aggregate dollar amount of "excess" incentive-based compensation and any amount that remained outstanding at the end of the last completed fiscal year;
  • any estimates used in determining the amount of excess incentive-based compensation;
  • the name of each person subject to recovery of excess incentive-based compensation as of the end of the fiscal year from whom the company decided not to pursue recovery, the amount in question, and a brief description of the reason the company decided not to pursue recovery; and
  • the name of each person from whom, as of the end of the fiscal year, excess incentive-based compensation had been outstanding for 180 days or longer.

Proposed Instruction 4 to new Item 402(w) would provide that, if the aggregate dollar amount of excess incentive-based compensation has not yet been determined, a company could disclose this fact and explain the reasons. The SEC also proposed that the disclosure required by Item 402(w) be provided in interactive data format using XBRL block-text tagging. The interactive data would have to be provided as an exhibit to the definitive proxy or information statement and as an exhibit to the annual report on Form 10-K.

Can a company indemnify its executive officers against amounts clawed back?

The proposed rule and accompanying SEC commentary expressly prohibit listed companies from indemnifying executives against the loss of erroneously awarded compensation due to a clawback or paying or reimbursing executives for insurance premiums to cover losses incurred under a compensation recovery policy. In its proposing release, the SEC mused that the insurance market could develop a policy that would allow an executive, as an individual, to purchase insurance against the loss of incentive-based compensation when the material accounting error is not attributable to the executive. In that event, an executive would be able to hedge the risk of a clawback liability, but the company would not be permitted to incur the cost of such a policy or reimburse the employee.

What is the timing for implementation of these rules?

The SEC provided that covered exchanges and associations be required to file their proposed listing rules no later than 90 days following publication of the final adopted version of Rule 10D-1 in the Federal Register, and that such listing rules be effective no later than one year following that publication date. A listed company then would be required to adopt its clawback policy no later than 60 days following the effective date of the revised listing standards.

There is no definitive timetable for the SEC's adoption of final rules. The comment period for the proposed rules expires September 14, 2015, making adoption before year end unlikely.

What should we be doing now?

It may be several months before the SEC adopts final clawback rules, and several more months before the securities exchanges and associations are able to propose and finalize their revised listing standards, taking into account their respective public notice periods. Only then would the 60 day period for a listed company to adopt a clawback policy begin to run. Therefore, it seems likely that listed companies will not need to comply with a listing standard requiring adoption of a specified clawback policy until sometime in 2016.

Although there could be significant changes to the proposed requirements prior to adoption of final rules by the SEC and the exchanges, the substance of the clawback requirements are statutorily mandated, and therefore not likely to change materially. Therefore, listed companies considering voluntary adoption of a clawback policy may wish to adopt a policy that follows the standards in the proposed rules. Companies with a clawback policy in place should review their policy to determine whether amendments will be needed if Rule 10D-1 is adopted substantially as proposed and whether to modify their policy now or wait until final rules are adopted.

Implementation of a clawback policy may impact the recommendations of proxy advisory firms. In its discussion of primary evaluation factors for executive pay for the say-on-pay vote, ISS has stated that a rigorous clawback provision is a factor that potentially mitigates the impact of risky incentives. Proxy advisory firm Glass Lewis has stated that it will consider recommending a vote against all members of the compensation committee when a new employment contract is given that does not contain a clawback and the company had a material restatement. With final rules now on the horizon, listed companies that do not have a clawback policy in place should begin considering the adoption of a clawback policy either in the near term or be ready to comply with the rules when finalized.

Listed companies may also wish to consider how the proposed definition of incentive-based compensation will apply to their compensation program if a clawback is required and whether any changes should be made to their program to reduce the risk that compensation would need to be clawed back from executives, balancing this risk with the increasing need in today's environment for compensation to be incentive-based. Companies should also consider the tax (including under Code Section 409A) and liquidity implications for executives of clawing back compensation paid as many as three years previously and how a clawback could best be implemented to minimize the negative impact on executives. Companies will also want to consider the tax and accounting implications for themselves as well as whether and how any of their compensation contracts or plans will need to be modified as a result of the implementation of a clawback policy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.