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All the Questions Confronting Clawback Policy

Joe Mont | July 7, 2015

Of all the executive compensation rules shepherded along by the Securities and Exchange Commission lately, the “clawback” rule proposed last week is among the more straightforward. The rule—a requirement that executive officers repay incentive-based compensation based on financial results that are later restated—lacks the political agenda of the forthcoming pay ratio disclosure rule, nor does it have the long-term implications of the pay-for-performance rules proposed earlier this year.

The clawback rule’s simplicity, however, will force companies to make difficult, confusing choices. Exactly how should the clawback be calculated? What should you do when an executive is no longer at the company, or the money is unavailable to reclaim?

Formally, the rule requires stock exchanges to adopt standards requiring all listed companies to have a “compensation recovery policy.” The amount to be recovered would be the difference between what an executive was originally paid, and...

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