The number of companies introducing clawback provisions has skyrocketed over the last five years, according to a new survey by The Corporate Library. About 329 of the 2,100 businesses surveyed have adopted provisions to recover cash and stock incentives in cases where financials have been misstated. That's compared to just 14 companies with a clawback policy in 2003, the last time the corporate governance research firm looked at the issue.
Why the increase? In some cases, companies have decided that it's simply good governance to voluntarily go a step beyond Sarbanes Oxley, says Paul Hodgson, the Corporate Library's senior research associate, executive and director, compensation. The regulation requires that top executives give back incentive compensation and stock sale profits in a year prior to a restatement caused by misconduct. Other companies have been pushed by activist shareholders. For example, last year, Home Depot adopted a clawback provision after a stockholder proposal to introduce one was voted in.
Still, not all clawback provisions are alike, according to The Corporate Library, which identified four types of policies. The most prevalent type — fraud-based provisions — applies only to those executives who engaged in misconduct that has caused a restatement; about 47% of companies surveyed, including General Electric, American Electric Power and Citigroup, use this kind of provision. On the other hand, performance-based clawbacks pertain to any executive who received an incentive payment based on incorrect financials. About 34% of companies — Qwest, Monsanto and International Paper among them — have introduced the performance-based version.
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The other two include non-compete provisions, put in place to recoup compensation if an executive has violated a restrictive covenant. They usually involve non-compete clauses. There's also a catch-all category that includes such situations as, for example, an executive who leaves a company without appropriate notice.
It's the performance-based variety that's the most preferable, according to Hodgson. "If shareholders are required to accommodate a loss that generally results in a drop in stock price, then executives who were rewarded for that illusory performance should feel some of the pain, by having to pay back some of their bonuses," he says.
The report found only one company — Warnaco Group — where a clawback provision had actually been used. According to the survey, the compensation committee reduced the annual incentive compensation for CEO Joseph Gromek, CFO Lawrence Rutkowski, and Frank Tworecke, president of the Sportswear group, based on restatement of fiscal 2005 financial results.
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