Four out of five companies with market caps of $10 billion or more require executives to give back incentive-based compensation in amounts and for reasons that go beyond what the Securities and Exchange Commission requires in its clawback rules that took effect in January, according to an analysis of 2024 proxy filings by FW Cook.
Almost 70% of these companies apply clawbacks to more executives than what the SEC calls Section 16 executives in its rules.
Section 16 executives are the president or CEO, CFO, chief accounting officer or equivalent and any other executive that has a significant policymaking role or oversees a substantive business unit.
Most big companies go beyond that to include either all senior management or all incentive plan participants, according to FW Cook, an executive compensation consulting firm.
Just under 45% of these companies will go after the compensation of the entire senior management team and 22% will go after anyone who participates in a compensation plan that’s tied to company financial performance, the analysis finds.
These companies are also tougher than the SEC on what would trigger a clawback.
The agency requires a clawback any time the company restates its financials, whether it’s a “little r” revision or a “big R” reissue, even if the restatement stems from an error and not misconduct. The clawback amount must come from whatever performance-based compensation is tied to the restated amount.
Just under 65% of companies go beyond this to include clawbacks whenever the executive is involved in fraud or misconduct regardless of whether it results in a restatement, and almost a third will go after pay if the company suffers reputational harm. About a quarter will go after pay if the executive violates a company policy or its code of conduct.
The companies are also more stringent on what pay must be given back. The SEC limits its rules to compensation that’s tied to company financial performance, so the amount of pay that’s tied to the restated amount must be given back. But almost 70% of companies go beyond that to require executives to give back broader types of compensation such as cash and equity incentives, including time-based awards, depending on the nature of the problem.
The SEC doesn’t enforce its clawback rules directly. It has required the country’s two big stock exchanges, Nasdaq and the New York Stock Exchange, to delist companies that don’t have a mandatory clawback policy in place, so they’re the agency’s defacto enforcers.
FW Cook based its analysis on the proxy filings of 45 big companies. Among the 20% of companies whose filings show their policies don’t go beyond the SEC rules, a third said they plan to examine their policies to see if they want to add additional requirements.
For companies that do go beyond the rules, general counsel play a role in ensuring the additional requirements don’t pose a conflict with what the SEC requires.
Mitchel Pahl, a partner at Katten Muchin Rosenman, has outlined ways in which in-house counsel can align their governing documents with the SEC rules.
