Even ahead of any new clawback rules mandated by Congress, companies are taking significant action on their own to add clawback provisions to executive compensation arrangements, and are swallowing some added accounting and financial reporting complexity to do so.

PwC recently analyzed publicly available information from 100 large public companies and found 40 percent of them had made some type of change to their compensation plans to modify clawback provisions in the past year. Even further, more than 80 percent of the clawback provisions examined in the study included discretionary features, or features where judgment is involved in determining whether they are triggered, says Ken Stoler, a partner with PwC.

The Sarbanes-Oxley Act produced the first significant requirement to add clawback provisions to certain executive compensation arrangements, and the Dodd-Frank Act in 2010 directed the Securities and Exchange Commission to develop newer rules. Although the SEC has not yet produced such rules, companies are taking measures on their own as a result of investor and market expectations, PwC says.

Discretionary features can add a wrinkle to the accounting, says Stoler, because they involve the use of judgment and can lead to a requirement under GAAP to measure them at fair value, reporting them on a mark-to-market basis each reporting period. “Depending on how a clawback is structured, we start to get concerned about whether there may be accounting implications,” he says.

When companies are considering adding discretionary features, analysis is critical, says Stoler, to determine how the provision will be measured as part of the compensation arrangement. “For accounting purposes, to get the good accounting that companies like, which is to measure the value upfront and lock it in over time, you need to have all the key terms of the arrangement locked and loaded when you give it to the employee,” he says. “When we have discretionary features to any arrangement, that gives us pause.”

The analysis did not reveal a significant number of companies are electing discretionary features that leading to fair value, mark-to-market accounting, Stoler says. “The accounting rules related to these clawback provisions is relatively sparse,” he says. “That’s part of the reason a lot of judgment needs to be applied. Every company and every accounting firm probably looks at it a little bit differently, which is part of what makes this a tricky area.”