Section 954 of the Dodd_Frank Act requires national securities exchanges (meaning for instance, the NYSE, Amex and Nasdaq) to adopt rules as directed by the SEC, which rules will require issuers to develop and implement a policy providing:
- for disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws; and
- that, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.
These policies are typically referred to as “clawback” policies.
Here are some recent examples of clawback policies from public filings:
- Nike (8-K filed July 20, 2010)
- Flextronics (Exhibit 10.06 to 10-Q filed on August 5, 2010)
- Ford (Exhibit 10.2 to 10-Q filed May 7, 2010)
- HCA (Exhibit 10.1 to 8-K filed April 6, 2010) (note here the policy is embedded in an incentive plan)
Will these policies work under Dodd-Frank? We do not know, because the rules are not yet written. But they are food for thought.
What is apparent however is there is no standard form for a clawback policy. We encourage compensation committees and boards to deliberate carefully when the time comes.
We did not prepare any of these policies and do not vouch for them. They were selected at random after a brief search.