Compensation recovery policies, often referred to as clawbacks, have increasingly become a key component of a solid corporate governance strategy at numerous Fortune 100 companies. Compensation recovery policies typically provide companies with the ability to recoup incentive-based compensation in the event of a financial restatement or if an executive commits an act detrimental to the condition of the company. Clawback policies may also cover non-compete arrangements or other special forms of compensation like relocation payments.

Clawbacks are of particular interest today because the SEC’s new compensation disclosure regulations require the discussion of compensation recovery policies in the recently adopted Compensation Discussion and Analysis (CD&A) section. Specifically, the SEC’s CD&A requirements include the following line item:

[Discussion of] company policies and decisions regarding the adjustment or recovery of awards or payments if the relevant company performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment.

While the SEC’s new disclosure regulations seem to address only clawbacks relating to incentive-based pay and financial restatements, they do ensure that compensation recovery policies of all types will become an important part of many corporate governance conversations in the near future.

Methodology

For this month’s analysis, Equilar reviewed the most recent annual proxy filings for 91 publicly-traded companies in the Fortune 100. Discussions of compensation recovery policies are typically disclosed in Compensation Committee Reports or in the text concerning corporate governance policies.

Prevalence Study

According to the most recent proxy filings, 17.6 percent of publicly-traded Fortune 100 companies disclosed some form of compensation recovery policy for their executive officers. Together, these policies cover most forms of executive compensation, including equity grants, cash-based incentive awards, and non-competition payments. Among the 16 companies disclosing a compensation recovery policy, four disclosed that their policies were adopted in early 2006.

Compensation recovery policies regarding financial restatements and/or ethical conduct appear most frequently and comprise 68.8 percent of all disclosed policies. These examples constitute 12.1 percent of the Fortune 100. The remaining 31.2 percent represent compensation recovery provisions in non-competition arrangements.

Six companies included a shareholder proposal in favor of the adoption of a compensation recovery policy for executives. Three examples appear at companies with no publicly disclosed compensation recovery policy, and three appear at companies with recovery policies. At the three companies with pre-existing compensation recovery policies, shareholder proposals seek to strengthen or expand current recovery provisions.

Financial Restatement and Conduct Policies

• American Express Co.
  DEF 14A filed on March 22, 2006
  Link to Filing

  "Detrimental Conduct. To help protect the Company’s competitive position, approximately 520 executives, including the executive officers, have signed agreements that include a provision that requires them to forfeit the proceeds from some or all of their long-term incentive awards received up to two years prior to employment termination, if they engage in conduct that is detrimental to the Company. Detrimental conduct includes working for certain competitors, soliciting the Company’s customers or employees after employment ends and disclosing the Company’s confidential information."

• Microsoft Corp.
  DEF 14A filed on October 4, 2006
  Link to Filing

  "Executive Compensation Recovery Policy
  
  The Committee has adopted an executive compensation recovery policy applicable to executive officers and the principal accounting officer. Under this policy, the Company may recover incentive income that was based on achievement of quantitative performance targets if an executive officer engaged in intentional misconduct that resulted in an increase in his or her incentive income. Incentive income includes income related to annual bonuses and SPSAs [Shared Performance Stock Awards]."

• Pfizer, Inc.
  DEF 14A filed on March 16, 2006
  Link to Filing

  "Financial Restatement
  
  It is the Board of Directors’ Policy that the Committee will, to the extent permitted by governing law, have the sole and absolute authority to make retroactive adjustments to any cash or equity based incentive compensation paid to executive officers and certain other officers where the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement. Where applicable, the Company will seek to recover any amount determined to have been inappropriately received by the individual executive."

Shareholder Proposals

• General Motors Corp.
  DEF 14A filed on April 28, 2006
  Link to Filing

  "Shareholders request our board to adopt a policy (in our bylaws if practicable), for our board to recoup for the benefit of our company all unearned incentive bonuses or other incentive payments to senior executives to the extent that their corresponding performance targets were later reasonably determined to have not been achieved. Restatements are one means to determine unearned bonuses.

  This would include that all applicable employment agreements and incentive plans adopt enabling or consistent text as soon as feasibly possible. This proposal is not intended to unnecessarily limit our Board’s judgment in crafting the requested change in accordance with applicable laws and existing contracts and pay plans."

• Hewlett Packard Co.
  DEF 14A filed on January 1, 2006
  Link to Filing

  "Shareholders request our board to adopt a policy whereby, in the event of a significant restatement of financial results or significant extraordinary write-off, our board will review all bonuses and any other awards that were made to senior executives on the basis of having met or exceeded specific performance targets during the restatement period and will recoup for the benefit of our Company all such bonuses or awards to the extent that the specified performance targets were not achieved and focus on those employees most responsible. This would include that all applicable employment agreements adopt enabling text in an expedited manner as soon as feasibly possible and/or retroactively."

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