On Oct. 26, the US Securities and Exchange Commission (SEC) voted to adopt new rules requiring securities exchanges to adopt listing standards that require issuers to develop and implement a policy to recover erroneously awarded incentive-based compensation received by current or former executive officers. According to reports, the clawback requirements are meant to hold corporate leaders accountable for the errors, whether they’re the result of fraud or simply mistakes.
Although many companies have had some sort of clawback policy in place, one of the biggest changes with the new rules will be what will trigger the clawbacks. For example, the SEC asked whether the clawback policy should be applied to both “Big R” and “little r” restatements.
According to Cooley PubCo, “Big R” restatements “correct errors that are material to previously issued financial statements,” while “little r” restatements “correct errors that are not material to previously issued financial statements but would result in a material misstatement if (a) the errors were left uncorrected in the current report or (b) the error correction was recognized in the current period.”
“By expanding the scope of these triggers, the SEC could potentially be turning ‘little r’ things to ‘Big R,’” said Deb Lifshey, managing director at executive compensation consultancy Pearl Meyer.
The good news for companies is that they have time to refine their clawback policy. Lifshey recommends companies start figuring out and planning for their policy at the start of 2023. Communication will play a big part in that strategy, Lifshey said, because the plan applies to compensation from current or former executives that was paid during the three years before the time that a restatement was required.
“A lot of work needs to take place,” Lifshey said. “Once these rules are published, the clock starts ticking.”