Issue link: https://digital.shearman.com/i/1512772
Shearman & Sterling LLP Compensation, Compliance Incentives and Clawbacks – DOJ Pilot Program and the SEC Clawback Rule | 38 Regarding clawback policies, as a preliminary matter, companies should ensure they have adopted a clawback policy that complies with the final SEC clawback rule. Companies may also consider reviewing any additional clawback policies that they have (whether as standalone policies or recoupment provisions in employment agreements, incentive compensation plans and related award agreements) to determine whether they have methods to reclaim compensation previously paid to employees and whether such recoupment mechanism covers a majority of the workforce. Be mindful that having a clawback policy alone without individual contractual commitments may present enforcement challenges in the event of criminal resolutions. Companies should consider having their executive officers and management execute contracts that acknowledge their compensation is at risk and may be subject to forfeiture or recoupment if there is a triggering event under the clawback policy. When entering into new employment agreements or making an equity grant, companies may also wish to review termination triggers (including the definition of "cause") to see whether the contract addresses failure to supervise. Be mindful that changes to compensatory arrangements and clawback policies applicable to named executive officers will be reflected in proxy disclosure and, depending on the change and who is impacted, may necessitate filing a Form 8-K. Questions to Consider • Are executives contractually required to forfeit or repay the company upon a determination that forfeiture or recoupment is appropriate? • Do existing clawback policies include conduct- related triggers in the event of a compliance breach, and do those triggers include direct and indirect misconduct? • What market data about compliance- performance measures and clawbacks should be presented to the compensation committee? Monitor Your Need The SEC clawback rule and Compensation Pilot Program are new initiatives. Companies should monitor how peers are implementing their SEC clawback policies and whether companies decide to modify their discretionary clawback policies to enhance conduct- related clawback triggers (including clawback triggers that are not connected to a financial restatement). Companies should also monitor how the Compensation Pilot Program is implemented to see if particular industries are impacted more than others, and the status of proposed SEC regulations on executive compensation at financial institutions, to see whether further changes are appropriate. Finally, companies should continue to ensure compensation committees are briefed on market trends around implementing compliance-promoting compensation metrics in incentive compensation programs.