Since the U.S. Department of Justice (DOJ) issued its directive on clawbacks to outline the provisions organizations should include in their executive incentive pay policy in March, proxy advisor Glass Lewis has issued its 2024 Benchmark Policy Guidelines.
These guidelines specify that Glass Lewis’s voting recommendations will be positively influenced for companies that can claw back variable incentive payments, whether time- or performance-based, in circumstances beyond just a financial restatement. But determining how exactly a company would go about expanding its clawback policy beyond its current Dodd-Frank policy is not just a turnkey exercise.
The first step is understanding the nuances of your current compensation plans and clawback provisions to decide whether there are other scenarios where a clawback may be warranted.
Holdback provisions address any number of potential events before bonus and long-term incentives are actually paid to employees. Many programs include a “must be present to win” provision so that terminated employees receive nothing if not employed at payment date.
When holdback provisions are in place, the pressure is off the compensation committee to hold back pay after a for-cause termination. When there is a not-for-cause termination, the same rule often applies … but not always. Also, the interplay of severance benefits in not-for-cause terminations needs to be examined.
In practice, it is important to understand the actions that would trigger a holdback of pay and whether there are circumstances in which severance is inappropriate. This requires a detailed analysis of all plan documents, grant agreements, employee communications and so on to reveal any inconsistent across-the-board treatment. Once identified, you will need to resolve and harmonize those inconsistencies.
When the U.S. Securities and Exchange (SEC) regulations were finalized, it was natural to assume that adopting a Dodd-Frank-compliant policy would be enough. For example, many companies had a so-called “Dodd-Frank light” policy that invoked a clawback only for executives whose fraudulent actions triggered an accounting restatement, likely referencing what is known as a “Big R” restatement – when prior financials are reissued.
When creating their Dodd-Frank policies, some companies also maintained a broader or second policy that either covers more employees or is triggered by an employee’s fraudulent/criminal acts of commission. Those companies will need to determine if those policies give them credit for the Glass Lewis voting decisions or the DOJ’s Criminal Division’s Pilot Program Regarding Compensation Incentives and Clawbacks.
The DOJ’s program is based on the idea that compensation programs that clearly and effectively impose financial penalties for misconduct can also deter risky behavior and foster a culture of compliance. As such – and effective for three years beginning March 15, 2023 – the DOJ might permit companies to reduce fines in criminal cases when companies seek to recoup compensation from culpable employees and others who both:
However, for companies to access this penalty reduction program, they would need to have a clawback policy in place before the criminal case arose. This means your company’s attorneys should be consulted to understand if access to this program is worthwhile.
Glass Lewis’s focus on expanded clawbacks is newer and will require companies to consider if they need more credit when seeking a positive voting recommendation from the proxy advisor. The Glass Lewis guidance focuses on excessive risk-taking that can materially and adversely impact shareholders, but may not necessarily trigger a restatement. An expanded policy could be discretionary, but would cover time and performance-based incentive compensation.
Glass Lewis will also assess situations where the company did not exercise its discretion in favor of recoupment and will base its grade on whether the company has included a “thorough, detailed discussion of the company's decision to not pursue recoupment.”
Our impression is that the Glass Lewis guidance offers far more details on the length and breadth of the clawback policy it is seeking. It may be that such a policy would meet the DOJ’s guidance, although this is not clear because the DOJ does not specify the type of policy eligible for its program.
Assuming your organization is considering additional clawback provisions, the following questions need to be resolved:
Finally, it also is important to note that clawback provisions are sometimes embodied in other documents. Your organization’s leadership as well as board of directors need a detailed inventory to ensure there are no overlaps in policies. They also need a strong understanding of overarching policies as well as their triggers and applications.
