CFO Zone
Clawbacks quickly catching on
By Stephen Taub
T. Rowe Price has joined a growing list of companies that have voluntarily instituted clawback policies.The mutual fund giant Friday announced in a regulatory filing that if it needs to undergo a material restatement of its financial results within three years of the original reporting, the Board will take certain actions if it determines any executive officer received incentive compensation, including equity awards, based on the original financial statements that in fact was not warranted based on the restatement.
The potential actions include the recoupment of all or part of any bonus or other incentive compensation paid to the executive officer, including equity awards; disciplinary actions, including termination; and/or other remedies.
There are two reasons companies are instituting clawbacks: If there is wrongdoing resulting in a restatement, or for strictly performance reasons.
Of course, Section 304 of the Sarbanes-Oxley Act contains a clawback provision that requires only the CEO and CFO return any bonus or other incentive-based or equity-based compensation received during the 12-month period following the first public issuance or filing with the Commission of an accounting restatement due to material noncompliance. They also must give back any profits realized from the sale of securities of the company during that 12-month period.
However, the SEC has only invoked this provision a handful of times.
Altogether, 73 percent of Fortune 100 companies had clawbacks in 2009 compared with 18 percent in 2006, according to a report from Bloomberg, citing Equilar, an executive compensation research firm.
There are a number of different reasons companies can take back their dough from executives. In some cases, the company may have restated prior results due to wrongdoing even if the executive was not involved in the wrongdoing.
An executive may have been deemed to have taken excessive risk, the wire service noted.
Kenneth Feinberg, the U.S. special master on executive compensation, has legal discretion to institute clawbacks from any TARP recipient if it is determined that compensation was received based on material misstatements or misrepresentations. So far he has not used this authority.
However, Bloomberg notes that five companies are subject to mandatory clawback provisions in 2010: General Motors, GMAC, American International Group, Chrysler Group and Chrysler Financial.
Meanwhile, a number of Wall Street firms are instituting clawback provisions on their own.
For example, in January J.P. Morgan Chase said any employee who receives company stock as compensation is now subject to clawbacks. According to the Wall Street Journal, the bank can force employees to return stock awards if they were found to have taken excessive risks or didn't blow the whistle on bad risk-taking.
Morgan Stanley recently told investors that its clawback policy, first instituted in 2008, was strengthened in 2009 to apply to substantial losses on trading positions, investments, commitments or other holdings. It also applies when risk parameters, compliance or ethics standards are violated.
In addition, it created at-risk performance units for senior executives that represent a significant portion of compensation and pay out only if the firm meets specific performance targets-return on equity and relative shareholder return-after three years.
Bank of America said in its proxy that a significant portion of compensation will be made through restricted stock awards that do not vest until the third year after grant and which are subject to clawbacks for performance (based on continued profitability), detrimental conduct or certain financial restatements.
Beginning with performance year 2009, equity awards to executive officers and other key risk-takers are subject to a "performance-based clawback" to encourage sustainable profitability over the vesting period. Under this clawback, awards may be canceled in whole or in part if losses occur during the vesting period.
Also beginning with performance year 2009, equity awards are subject to a detrimental conduct clawback to encourage compliance with policies and appropriate behaviors. If an executive officer engages in detrimental conduct, unvested awards are subject to cancellation and previously vested awards may be recouped, the financial giant said.
In addition, since October 2007, BofA said it has had a recoupment policy under which the Board can require reimbursement of any incentive compensation paid to an executive officer whose fraud or intentional misconduct caused the company to restate its financial statements
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