Compensation Clawbacks: Trends and Lessons Learned

21 October 2020 Legal News: Employee Benefits Insights Publication
Authors: Joshua A. Agen

Executive compensation clawback policies continue to grow in popularity. Although the Securities and Exchange Commission (SEC) has not yet finalized its rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that will require publicly-traded companies to adopt compensation recovery policies, many companies have now voluntarily adopted clawback policies.

More than 90 of the 100 largest publicly-traded companies have disclosed that they maintain compensation clawback policies. A large number of companies have been revisiting their existing clawback policies and considering potential updates, and some have sought to recover compensation under their policies.

This article summarizes trends in clawback policies and some lessons that can be learned from the growing body of experience with them. For companies that are considering adopting or updating clawback policies, these trends and experiences may help to guide their design decisions.

1.  Compensation Clawback Trends

Publicly-traded companies have had mandatory clawback requirements since the Sarbanes-Oxley Act was enacted in 2002. Sarbanes-Oxley imposed a relatively narrow clawback requirement that applies only to the CEO and CFO and is triggered only if a restatement of financial results occurs as a result of misconduct.

In 2010, Dodd-Frank included a more expansive clawback requirement that would apply to all executive officers (not just the CEO and CFO) and would be triggered by restatements of financial results, whether or not they were caused by misconduct. However, the Dodd-Frank clawback requirement is not yet effective due to a delay in the publication of final rules. (Proposed rules were issued in 2015, but they have not been finalized.)

Apart from legally required clawback policies, many publicly-traded companies have voluntarily adopted clawback policies in response to pressures from proxy advisory firms or investors or out of a belief that clawbacks are part of good governance.

There has been a notable trend in these voluntarily-adopted compensation clawback policies to broaden them to apply in more circumstances and cover additional types of compensation and conduct. In addition, proxy advisory services and institutional investors have in recent years adopted policies favoring clawback policies with specific designs. Some areas in which clawback policies have broadened, as well as certain proxy advisory and investor policies, are discussed below.

A.  Financial restatements triggering clawbacks without misconduct

One way in which some clawback policies have been broadened beyond the original scope of Sarbanes-Oxley is to include as triggering events financial restatements that are not the result of executive misconduct. This trend was likely given momentum by Dodd-Frank and the SEC’s anticipated rules under Dodd-Frank, which would require recovery of compensation following a qualifying restatement of financial results regardless of executive misconduct.

B.  Reputational harm

Another way in which some clawback policies have been broadened is to include as triggers events that would result in non-financial harm, such as reputational harm. Reputational harm triggers are generally intended to allow a company to recover compensation in the event there is a corporate scandal that does not directly impact financial performance. Such events are often defined to include unethical business practices, problematic corporate cultures, or #MeToo harassment or similar behavior.

C.  Failure to supervise or identify risk

Some recent clawback policies include as grounds for a clawback failures in supervision, such as behavior by subordinates likely to cause reputational harm, or a failure to identify and elevate risks appropriately.

D.  Breach of policy or restrictive covenants

It is increasingly common for clawback policies to include as a triggering event for a recovery of compensation an executive’s policy violation or breach of a noncompetition obligation or similar agreement.

E.  Selected proxy advisory firm and investor policies

Leading proxy advisory services, such as ISS and Glass Lewis, as well as institutional investors, have encouraged a trend toward more expansive clawback policies through their voting policies. Some of their policies are summarized below:


ISS  Glass Lewis  Blackrock  CalPERs  Council of Institutional Investors
A clawback policy satisfying certain criteria may contribute toward a higher governance score or favorable voting recommendations on equity plan proposals.  Glass Lewis favors clawbacks triggered by financial restatements regardless of misconduct in its evaluation of say on pay.  Blackrock favors clawbacks in the event of faulty financial reporting or deceptive business practices, as well as in the event of an executive’s behavior causing direct financial harm to shareholders, reputational risk, or a criminal investigation.  CalPERs encourages companies to have clawback policies covering fraud, inadequate oversight, misconduct including harassment, or gross negligence that is reasonably expected to impact financial results or cause reputational harm.  CII supports clawback policies covering fraud, financial restatement, personal misconduct, or ethical lapses that could cause material reputational harm. 

2.  Lessons Learned

A.  Advancement of legal fees

Recent litigation has highlighted an issue that companies may wish to consider addressing in their compensation clawback policies. After a company filed suit to recover compensation from former executives due to alleged wrongdoing, the officers responded by seeking to have their legal fees advanced and to have the company indemnify them. The executives sought these benefits under the company’s bylaws, which included typical language providing that legal fees would be advanced and indemnification provided when a claim related to actions taken in a former executive’s official corporate capacity was brought. The company’s compensation clawback provision did not address the advancement of fees or indemnification.

The Delaware Chancery Court awarded advance payment of legal fees to the former executives. If the ultimate judgment in the case was in favor of the company on the clawback issue, the executives could be required to repay the advance legal fees. However, advancing legal fees may make it easier for executives to resist a clawback and the company may not have intended to fund clawback litigation in this instance. A similar concern may apply with respect to certain indemnification benefits. To provide clarity on this issue, a company adopting or revising a clawback policy might consider stating expressly its intention concerning advance legal fees and indemnification in the event litigation occurs over the clawback policy.

B.  Investigation of potential wrongdoing prior to payment

In another high-profile instance of litigation involving an attempted clawback, the company initially agreed to pay out severance benefits to a terminated executive but subsequently uncovered alleged misconduct more egregious than initially believed. The company is now seeking to recover the severance benefits on the basis that the misconduct, and the executive’s attempt to cover it up, violated the company’s policies and triggered one of its clawback policies. This case illustrates the expense and negative publicity that can be triggered by a clawback action and the corresponding importance of a careful and thorough investigation before paying amounts in connection with a termination to minimize the likelihood that a later clawback will be needed.

In addition to the trends and lessons learned discussed in this article, any adoption of, or revision to, a clawback policy involves other considerations, including tax, enforceability, disclosure, and governance issues, so any company considering adopting or revising a clawback policy should consult with its advisors before taking final action.


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