How Public Companies Can Prepare For The Executive Compensation Clawback Regime

by Locke Lord LLP

Many public companies have not waited for the Securities Exchange Commission (SEC) to mandate executive compensation recovery policies, as required by the Dodd-Frank Act. Shareholder and peer pressure has resulted in the adoption of a range of clawback policies. However, virtually all of these policies must – as a condition to stock exchange listing – be tightened substantially to comply with the rule recently proposed by the SEC.1 Companies that have not yet adopted such policies will need to do so once the exchange listing standards are adopted.

Under Rule 10D-1, a public company would be required to adopt, disclose and enforce a policy providing that, if it is required to restate financial statements due to material noncompliance with financial reporting requirements, it will recover from any of its current or former executive officers who became entitled to receive incentive-based compensation during the preceding three fiscal years so much of that compensation as exceeds what would have been paid absent the error.

The rule is subject to comment and may be revised before it is final, and will then need to be translated to listing standards by the stock exchanges, so any actual recoupment of compensation will not be required for some time. But public companies should not wait to prepare. 

First, to the extent any company needs an additional incentive to ensure that its financial statements comply with financial reporting requirements, the initial compliance date – as of which a clawback could be triggered by material error – will be when the SEC rule is finalized: potentially as early as September 30 of this year, but more likely December 31.

Second, even though some details of the rule may change before final adoption, there are a number of issues and processes that companies can and should address in advance to ensure a smooth transition to the new regime.

Updating Existing Clawback Policies
Most existing clawback policies will need to be tightened to comply with Rule 10D-1. In particular:

  • Existing policies typically allow the Board complete or substantial discretion in deciding whether to seek recovery and on what basis. The proposed rule allows no discretion, and permits the company to cease recovery efforts only if they would cost more than the amount of the proposed recovery (or, for foreign private issuers, in some circumstances where recovery would violate home country law).
    • Note that the lack of discretion seems to resolve concerns over whether a company’s equity grants might be subject to variable accounting treatment, requiring potentially uncapped mark-to-market charges during the clawback period. 
  • Existing policies typically provide for recovery in the event the financial statements were misstated due to misconduct, and then only from the persons responsible (sometimes only fraudulently) for the misconduct. The proposed rule provides for recovery on a no fault basis; i.e., (i) irrespective of the reason for the misstatement and (ii) from all persons who were executive officers and received incentive-based compensation the amount of which was increased by the misstatement.
    • Most companies’ policies include additional triggers for a clawback, such as breach of corporate policies, breach of noncompetition covenant, and other actions constituting “cause.” These would not be affected by Rule 10D-1. 
  • Existing policies may limit the type of compensation that is recoverable, or give the Board discretion to decide which compensation is recoverable. Some companies now limit recovery to vested equity. The proposed rule requires clawback of all excess “incentive-based compensation,” whether cash or equity and whether vested or not.
    • “Incentive-based compensation” would include any compensation that is granted, earned or vested based upon (a) the attainment of financial reporting measures used in preparing the company’s financial statements or any measures that are derived from such measures (i.e., non-GAAP financial measures), (b) the company’s stock price, or (c) total shareholder return (TSR).
    • The “excess” recoverable amount in the case of compensation based on stock price or TSR may be based on “a reasonable estimate.”
  • Existing policies may limit the look-back period for identifying compensation that is potentially subject to recovery to less than the three years required by the proposed rule. 
  • A minority of existing policies only apply to a handful of senior executives (e.g., the “named executive officers”); these will need to be broadened to cover all “executive officers” (the Section 16 reporting persons). However, subject to the following point, most policies already apply either to all executives or to an even broader group of employees than the rule requires.
    • Current policies, however, typically do not also cover former executives, who will be included under the proposed rule.

Note also that:

  • Companies would be barred from either indemnifying executives against clawback liability or paying premiums for insurance policies providing such indemnification. 
  • Extensive disclosures will be required if a clawback is triggered.

The proposed rule does not give companies much leeway, but some aspects – such as the manner in which a company would calculate the “excess amount” where compensation had initially been based on stock price or shareholder return – are controversial, and the SEC has requested comment on dozens of questions. 

In addition, many companies have not, in their compensation plans and executive employment agreements, been reserving their right to recover compensation under such plans and agreements if required by the SEC rule. This may complicate future clawback actions. It also remains to be seen how companies will be able to enforce a recovery in the face of an inconsistent state wage law. The SEC’s release proposing Rule 10D-1 simply asserts that companies may amend inconsistent contracts and says nothing at all about federal preemption of state laws. These topics will undoubtedly garner more attention.

Planning for Implementation
Topics companies should begin addressing now include:

  • Review existing clawback policies to determine what must be revised. 
  • Review existing compensation plans and policies to determine what forms of compensation would be recoverable.
  • Review existing executive employment, retention and indemnification agreements to (a) evaluate the company’s right to recover compensation without provoking a breach and (b) ensure that they do not provide indemnification for clawed back amounts. Don’t make the situation worse by entering into new agreements that don’t incorporate the company’s policy. 
  • Consider what amendments should be made to existing plans, grants and agreements to facilitate any recovery that becomes necessary. Whether and how an employment agreement may or should be amended requires attention to the language of the agreement, other applicable law and governance and personnel considerations.
  • Review and, if necessary amend, the charter and bylaws to ensure they do not provide indemnification for clawed back amounts.
  • Consider adding or beefing up stock ownership guidelines and post-vesting holding periods for equity grants. This is in the nature of self-help, enhancing the likelihood that incentive compensation is not dissipated during the lookback period. However, see the next point.
  • Consider how to limit the adverse tax impact of any recovery that may be required. Tax planning is necessary. For example, if a clawback policy requires a holdback of compensation to be paid in the future, Section 409A of the Internal Revenue Code may impose a penalty if that compensation is clawed back early.  Another Section 409A problem may arise if the clawback is enforced by offsetting amounts from severance or other compensation owed to the executive. 
  • Consider which board committee should have responsibility for implementing the policy. Since all executives who received incentive-based compensation will be subject to any given clawback action, this responsibility is unavoidably one for the directors. The relevant committee charter should be reviewed with the new requirement in mind.
  • Consider whether the Side A coverage in the company’s D&O policy would – or should – cover an executive’s costs of defending against the company’s clawback claim. This should at least be considered for executives who were not at fault in connection with the restatement. Although insurance covering an executive’s defense costs is apparently permissible under the proposed rule, the board may not like the shareholder optics. Whichever the conclusion, the company should make sure that its D&O policy works as desired. Among other points, if coverage for defense costs is desired, the D&O policy may need to be endorsed in order to waive any insured v. insured exclusion solely with respect to the defense of the company’s clawback claim.   
  • Consider – with the compensation consultants – whether, and the extent to which, the company might move away from incentive-based compensation to reduce the clawback risk. This also carries shareholder optics risks, especially given the pressure in recent years to increase the proportion of performance-based compensation in the mix, but it should not be ignored.
  • Consider ancillary steps, such as adopting an exclusive forum by-law if not already in place. It is to be expected that some shareholders will seek to capitalize on the new rule by bringing derivative lawsuits on the basis that the board of directors did not obtain an adequate recovery, so companies should consider other steps to reduce the expense of such actions.
  • Finally, begin to socialize executives (and the board of directors) to the new environment. This may be the most important activity of all.

The proposed rule will probably be revised before it is finally adopted. However, companies should not wait until then to plan for implementation. For more information on the matters discussed in this LockeLord article, or if you would like to discuss submitting a comment to the SEC on the proposed rule, please contact the Locke Lord lawyer who handles your affairs or any of the lawyers listed to the right.

1 (July 1, 2015). The rule itself begins on page 178.

Written by:

Locke Lord LLP

Locke Lord LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at:

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit
  • New Relic - For more information on New Relic cookies, please visit
  • Google Analytics - For more information on Google Analytics cookies, visit To opt-out of being tracked by Google Analytics across all websites visit This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at:

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.