HR Policy Association in conjunction with the Center On Executive Compensation supports the use of clawback policies as the flip side of a pay for performance philosophy. Clawback policies provide for recoupment of compensation from executive officers in the event of fraud, malfeasance or a material accounting restatement that alter the financial metrics upon which certain incentive payments were based, regardless of fault (these are called “no-fault” clawbacks). The Center supports no-fault clawback policies, but also supports providing the board of directors with reasonable discretion in determining the amount to be recouped as well as how the money will be clawed back. This interpretation recognizes that Board compensation committees often exercise discretion in determining how incentive compensation is awarded and accordingly it should be recouped the same way. The board must be afforded the discretion to execute clawbacks consistent with the best interests of shareholders (e.g., where the cost of recoupment far outweighs the amount being clawed back) or by canceling unvested restricted stock rather than requiring repayment in the form of a check.

The Securities and Exchange Commission is required to promulgate rules implementing the Dodd-Frank Act’s no-fault clawback requirement, which applies to current and former executive officers. These rules are expected to be proposed during the first half of 2013. During this process, the Association and the Center will continue to advocate that the SEC implement this requirement with a board-centric approach.