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Executive Compensation Clawbacks. Ann Graham, JD, MBA Professor of Law Director, Business Law Institute Hamline University School of Law Banking Law Prof Blog: http://lawprofessors.typepad.com/banking/. Executive Compensation Clawbacks. Public Outrage:

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Executive Compensation Clawbacks

Ann Graham, JD, MBA

Professor of Law

Director, Business Law Institute

Hamline University School of Law

Banking Law Prof Blog: http://lawprofessors.typepad.com/banking/

executive compensation clawbacks
Executive Compensation Clawbacks

Public Outrage:

Make the Bad Guys Give the Money Back!!!

sarbanes oxley sox 304 2002
Sarbanes-Oxley (SOX) § 304 (2002)
  • Sarbanes-Oxley § 304
    • CEOs and CFOs of Public Companies
    • Bonus, Incentive/Equity based compensation, Stock Sale profits
    • 12 Months following incorrect public disclosure or SEC filing
    • Due to Material Non-compliance with financial reporting
    • Due to Company’s Misconduct
    • Only SEC can bring action
  • SEC initially used for “personal involvement”
  • Moving to “no-fault” cases
  • SEC v. Jenkins– Settlement 11/15/2011 ($2.8M of $4M)
  • Maynard L. Jenkins – former CEO of CSK Auto
troubled asset relief program tarp clawbacks
Troubled Asset Relief Program (TARP) Clawbacks

Emergency Economic Stabilization Act of 2008 (10/3/08) – (“EESA”)– Establishes TARP

Requires Financial Institutions receiving TARP funds to establish clawback standards

Trigger: Bonus or incentive compensation paid is based on statements of earnings, gains, or “other criteria” that are later proven “materially inaccurate”

NOTE: Misconduct not required, Restatement not required

Senior Executive Officers: CEO, CFO, next 3 most highly compensated execs

Compensation recovered: Bonuses & Incentive Compensation

tarp clawbacks
TARP Clawbacks

Big Banks repaid TARP funds, avoided clawbacks & executive compensation caps

Smaller Banks repaid Capital Purchase Plan (CPP) funds from other government programs

GAO Report (3/8/2012) - http://www.gao.gov/products/GAO-12-301

Other Bank Bailout statutes & regs have different standards:

TARP Press Release – Guidance (2/4/09)

Capital Purchase Program (CPP) – Guidance

American Recovery & Reinvestment Act of 2009 (2/17/09)

tarp arra clawbacks
TARP/ARRA Clawbacks

Institutions receiving TARP funds

5 SEOS and next 20 most highly-compensated

Based on statements of earnings, revenues, gains, or other criteria that are materially inaccurate

Note: Misconduct not required

Accounting Restatement not required

Duration: Clawback requirement applicable during period financial assistance remains outstanding

fdic clawback regulations
FDIC Clawback Regulations

Senior Executives & Directors – substantially responsible for the failure of an insured institution

Recover: Any compensation received during the 2-year period prior to FDIC’s appointment as Receiver

In the case of Fraud

Authority: § 203(b) of Dodd-Frank

FDIC: “Compensation” is salary, bonuses, incentives, benefits, severance pay, deferred compensation, golden parachute & all other compensatory items

ISSUE: D&O Insurance Rider

executive compensation clawbacks1
Executive Compensation Clawbacks
  • Dodd-Frank Act – July 21, 2010 - § 954
  • SEC
  • National Securities Exchanges – Listing standards must require LISTED COMPANIES to adopt a Compensation Recovery Policy:
  • Adoption of Mandatory Recoupment Policies:
      • Any current or former Exec Officer
      • Any incentive-based compensation, including stock options
      • Three-year period preceding date Accounting Restatement is required is based on erroneous data – No executive wrongdoing required
      • Clawback amount: Excess paid on basis of Restatement
  • Disclosure of Clawback Policy for incentive-based compensation paid out based on erroneous financial information reported under the Securities Laws
sec timeline open questions
SEC Timeline & Open Questions

July – December 2012

Consequence for company: Possible delisting

When does triggering period commence? Decision to file restatement or when it occurs

Definition of “Executive Officer”

Definition of “Incentive-Based Compensation”

Clawback based on award or payment of compensation?

clawback policies
CLAWBACK POLICIES
  • “Bad Boy” Provisions in Employment Contracts
    • Disclosure of confidential information
    • Violation of company rules & policies
    • Engaging in “detrimental conduct”
  • State “Wage & Hour” Law Issues
  • Tax Treatment of Clawbacks
    • Income to Employee in Year of Actual or Constructive Receipt
    • Employee takes a Loss Deduction in Year of Clawback
    • Employer takes Deduction in Year of Payment
    • Employer Income for Year of Repayment
drafting clawback policies
Drafting Clawback Policies

Statute

Company Purpose: SH, EE, Public Perception

Draft Narrowly

Covered Employees

Define Compensation

Trigger

Reachback

Discretion?

Who Administers?

Is It Enforceable?

Get consent of affected executives in writing up front

Best Practice for Private Company?