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Boards are being warned to expect shareholder blowback if their company decides not to claw back pay from a CEO who is fired or resigns after a scandal. While stockholder lawsuits over clawbacks have been rare so far, experts expect to see more litigation on the issue moving forward.
According to Deborah Lifshey, managing director in the New York office of compensation consultancy Pearl Meyer, some companies have moved toward establishing a clawback policy in line with the SEC’s proposed Dodd-Frank rule, which requires the company to recoup incentive compensation if it issues a restatement, regardless of whether the executive was at fault, on the grounds that the incentive comp wasn’t really earned.
Most employment agreements allow the board more discretion on when to rescind compensation and why. Recoupment agreements are usually negotiated between the new executive, the company, and the board.
“Whether or not it would really deter someone from signing on, I haven’t seen that be a deal-breaker ... yet,” Lifshey says, adding, “In light of recent litigation, however, I would imagine this is something the lawyers may now focus on in their negotiations.”
Lifshey says that crafting a very specific clawback policy would be impossible. Financial restatements, which the SEC rule focuses on, are rare. Many other types of specific bad behavior are hard to imagine before they occur.
“Outside of a restatement, it’s inappropriate to have broad automatic recoupment triggers. That’s something that should be left to the board. The business judgment rule is intended to provide directors with this discretion and it is a topic not meant for the courts to decide,” Lifshey says.