SEC Approves Clawback Listing Standards

June 14, 2023

Erroneously awarded compensation is the aim of clawback rules mandated by the Securities and Exchange Commission. Listed companies will have until December 1, 2023 to comply with the SEC’s clawback rule and related exchange listing standards, originally mandated by Section 954 of the Dodd-Frank Act in 2008. Nasdaq and the New York Stock Exchange (NYSE) submitted amended compliance dates for their clawback-related listing standards last week that were subsequently approved by the SEC. This finally brings into focus deadlines by which companies must comply. Under both NYSE and Nasdaq clawback listing standards, listed companies will be required to claw back incentive awards received on or after the October 2, 2023 effective date.

Our team addresses the questions most on the minds of boards as they consider the ramifications of SEC guidance aimed at recovering erroneously given compensation.



Q1: Does the SEC rule refer to clawing back the value of awards or the number of shares that vested?

The SEC generally refers to the value or “amount” of awards and notes that the definition of erroneously awarded compensation is to be applied in a principles-based manner; the SEC gives some additional guidance by vehicle type, as listed below.

    • For cash awards, the erroneously awarded compensation is the difference between the amount of the cash award (whether payable as a lump sum or over time) that was received and the amount that should have been received applying the restated financial reporting measure
    • For cash awards paid from bonus pools, the erroneously awarded compensation is the pro-rata portion of any deficiency that results from the aggregate bonus pool that is reduced based on applying the restated financial reporting measure
    • For equity awards, if the shares, options, or SARs are still held at the time of recovery, the erroneously awarded compensation is the number of such securities received in excess of the number that should have been received applying the restated financial reporting measure (or the value of that excess number). If the options or SARs have been exercised, but the underlying shares have not been sold, the erroneously awarded compensation is the number of shares underlying the excess options or SARs (or the value thereof)

Of note, the SEC allows board discretion to determine the means of recovery, which can include things such as cancelling unrelated unvested awards, offsets against unpaid incentive compensation, offsets to future compensation obligations, etc.

(Sources: pages 79; and 96-98 of SEC rule)


Q2: If a company includes time-based equity in its clawback but does not allow for board discretion and only adopts the SEC trigger (any restatement), will ISS give them credit for including time-based equity in the policy, even if on a practical basis the board cannot claw back the time-based awards?

A: ISS has not provided guidance around this scenario. Typically, if ISS realizes companies are including language in their policies or equity plan provisions that effectively nullify the practice or feature that would allow for credit, ISS will begin to identify this as part of their data collection process and not give companies credit; ISS will then usually release more specific expectations in its FAQs of what language would qualify to receive credit. This may happen if ISS identifies the clawback and time-based equity scenario as a common issue.


Q3: Are premium-priced options subject to clawback under the SEC rule?

A: The SEC does not directly address premium-priced options. But based on the language of the rule, it appears they would not be covered under a clawback because their vesting or granting is not dependent on the achievement of a financial (including TSR/stock price-based) measure. This is like regular time-based options, which are not covered because they vest based on just satisfying an employment period.

Examples of equity awards covered under the SEC rule:

(Source: Pg. 64 of SEC rule)


Examples of equity awards not covered under the SEC rule:

(Source: Pg. 65 of SEC rule)


Q4: How should a company determine “excess compensation” for a stock price/TSR incentive measure?

A: While the SEC acknowledges that it may be difficult to establish the relationship between an accounting restatement and the stock price, it believes the additional costs associated with these factors are justified in order to better achieve the objectives of the statute.

Companies are permitted to use reasonable estimates when determining the impact of a restatement on stock price and TSR. To reasonably estimate the effect on the stock price, there are a number of possible methods with different levels of complexity of the estimations and related costs (e.g., an event study). Under the final rules, companies have flexibility to determine the method that is most appropriate based on their facts and circumstances.

If such a restatement occurs, companies are required to disclose the estimates that were used in determining the erroneously awarded compensation attributable to an accounting restatement and an explanation of the methodology used to estimate the effect on stock price or TSR.

(Source: page 63 of SEC rule)


Q5: For clawbacks, what happens if the restatement results in better financials and would mean a higher incentive payout?

A: The SEC rule doesn’t cover this scenario. It only covers cases where the amount paid is in “excess” of what should have been paid. Per SEC regulation, “Implicit in these statutory requirements is that the amount of such compensation received in the three-year look-back period would have been less if the financial statements originally had been prepared as later restated.

(Source: page 53 of SEC rule)

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