The question whether and how to effectively regulate executive compensation is not limited to the financial sector, however, and neither were the legal initiatives that came out of the post-crisis political agenda. The main concern driving the initiatives that were not specifically aimed at financial institutions was that pay schemes rewarding short-term performance incentivise managers to take excessive long-term risks or engage in financial misreporting.
Among the ideas that have gained some prominence in the course of this post-crisis debate about general corporate governance reforms is that, when things turn out to have gone wrong, executives should be exposed to the negative consequences, and know in advance that their employment contract stipulates such exposure.
Clawback provisions in executive employment contracts are an expression of this idea; very generally speaking, a clawback is a contractual provision that allows recovery of variable compensation that has already been paid. Clawback prevalence in listed companies has risen considerably over the last two decades, beginning in the US after the financial crisis and the collapse of Enron, and continuing in European companies over the last years.
Despite widespread adoption, however, the US experience shows that current clawbacks are rarely ever activated and much less enforced. The paper thus starts out from the following two questions: Do clawbacks as a measure of corporate governance generally make sense?
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The "clawback" of pay from high-level executives for malfeasance is a hot but complex topic. Designed properly, such a practice can be an important mechanism for corporate accountability. The Dodd-Frank bill, passed last month, mandated that any company listed on a U. Also in July, the European Parliament passed legislation requiring clawbacks, and the U.
As companies revise or adopt clawback policies-whether voluntarily or because they are required to do so-these questions and others will be reexamined and policies reformulated.
More basic questions, however, must first be addressed: What is the mission of the corporation, how is corporate action evaluated according to that mission, and in that context, what is the philosophy of executive compensation? I believe that four such "first" principles should guide a clawback policy that companies adopt voluntarily. The mission of the company is to create durable value for shareholders and other stakeholders through sustained economic performance, sound risk management, and high integrity.
The most basic purpose of the corporation is for leaders to find a sound balance between risk taking innovation and creativity and risk management financial and operational discipline and then to fuse that high performance with high integrity commitment and adherence to law, ethics, and values. The job description of the CEO -and executive training inside the corporation-must flow from this mission and be built on these integrated essentials of performance, risk, and integrity-and on a culture in which all are honored and exemplified.
In choosing a CEO-and approving training and promotion of senior executives-the board must explicitly carry out this fundamental mission in its most important function: naming top-level business leaders. For example, as Kelly is moving through attainment tiers during the quota period, the clawback amount is artificially tied to when in the period the deal closed. However, in the same period, Kelly earns accelerated commissions due to being above quota.
What We Like: The most intuitive and simple for both employer and sales rep to follow. Method B protects the company from over-attainment by applying the clawback as a reduction of quota credit. The clawback is treated as a negative deal amount, or treats it as if it were a sale made with a negative revenue amount.
As seen in the calculation below, a Deal A Clawback is added as a negative amount to the attainment in Period 2. This method is operationally very simple to automate in a calculation spreadsheet or system.
This is because most CRMs can provide a debook record in the exact negative amount as the original deal. Further, there is no need to reference historical payout periods, as you would in Method A or in Method C described next.
One potential negative impact that this can have is that it may motivate sales reps to defer deals into later periods if the attainment of Tier 2 commissions seem out of reach in Period 2. If Kelly thinks that this is not attainable during Period 2, she will be incentivized to defer deals into Period 3. Both larger size and lower count of period deals contribute to this potential disincentive. However, given the operational simplicity of this method, it can be very useful where there is high deal volume that can limit any disincentives to deal performance.
Salary sacrifice optional remuneration arrangements. Sign-in Help. The following Share Incentives practice note produced in partnership with Nick Hipwell, Sarah Ferguson and Chris Baker of DLA Piper provides comprehensive and up to date legal information covering: Malus and clawback The use of malus and clawback What are malus and clawback?
Meaning of malus Meaning of clawback Meaning of cross-clawback Development of the use of malus and clawback provisions Practical considerations Who will the clawback apply to? Who makes the decisions? For how long can the malus and clawback apply?
How are malus and clawback effected? Enforcement of malus and clawback provisions How much to claw back—taxation issues Further considerations Financial services regulation and malus and clawback Will malus and clawback work abroad? Access this content for free with a trial of LexisPSL and benefit from: Instant clarification on points of law Smart search Workflow tools 36 practice areas.
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