The Securities and Exchange Commission has moved forward on proposed rules that would require companies to develop and implement policies to “claw back” incentive-based executive compensation that later is shown to have been awarded in error.
“The objective of this rule is an important one,” said SEC Chairwoman Mary Jo White, reading from her prepared statement during an SEC open meeting on Wednesday. “Simply put, executive officers should not be permitted to retain incentive-based compensation that they should not have received in the first instance, but did receive because of material errors in their companies’ publicly reported financial statements. The proposed rules are designed to prevent that from happening.”
During the meeting on Wednesday morning, the commission approved the proposal for publication with a 3-2 vote. The SEC will now seek comment on the proposed rules, which will be published on the SEC’s website and in the Federal Register. The comment period for the proposed rules will be 60 days after publication in the register.
This proposal, often referred to as the “clawback” rule, was the last of the Dodd-Frank Act executive compensation rulemakings remaining for the SEC to propose.
According to White, these proposed rules would “increase accountability and bring greater focus to the quality of financial reporting.”
Under the proposed rules, national securities exchanges and associations will have to establish listing standards that would require companies to adopt and comply with a compensation recovery policy. Additionally, recovery would be required from current and former executive officers who received incentive-based compensation during the three fiscal years preceding the date on which the company is required to prepare an accounting restatement to correct a material error.
The proposed rules define “incentive-based compensation” to include performance-based compensation paid to executives based on a company’s stock price and/or total shareholder return.
According to Commissioner Luis A. Aguilar, a study released on June 4 showed that approximately 51% of the top 200 public companies making performance-based grants for executive compensation based it on a total shareholder return measure.
“In today’s corporate world, many executives are earning eye-catching sums,” Aquilar said during the open meeting. “Much of the increase in executive compensation is commonly attributed to the impact of incentive-based compensation, including equity and other performance-based compensation plans.”
However, the SEC’s definition of “incentive-based compensation” does not include all forms of executive compensation. It does not include bonuses paid solely at the discretion of a company’s board of directors, or equity awards that vest solely upon completion of a specified employment period.