Clawback Regulations

Executive Clawback Regulations: Adapting to the New Pay Revisions

The (SEC) Securities and Exchange Commission  and the (DOJ) Department of Justice have just unveiled clawback regulations that could “claw back” or take from you funds from your executive compensation. If the new regulations go into effect, they could transform the entire landscape of C-suite remuneration.

At Gardner Employment Law, we specialize in understanding the complexities of laws that impact executives’ compensation. If you are interested in avoiding the loss of compensation based on these new regulations, please continue reading.

What are the New Clawback Regulations?

In a bold move to revolutionize corporate responsibility, the SEC has laid down new rules compelling companies – including those listed on the NYSE and NASDAQ – to implement stringent clawback provisions by December 1, 2023. These provisions mandate the reclamation of improperly awarded incentive-based pay from both current and former executives because of misrepresentations or misconduct. This is more than enhanced financial reporting; these new regulations are meant to improve trustworthiness in incentive awards to executives and build corporate trust.

Additionally, the DOJ will expand the definition of corporate oversight, casting a wider net beyond mere financial discrepancies. This new oversight program will be on alert for an array of corporate malfeasances, from antitrust violations to corporate fraud. In essence, the DOJ is strategically removing the onus from shareholders’ role to monitor to those at the helm, and instead introducing rigorous benchmarks for executive to reach to justify the compensation and bonus structures.

As a silver lining, companies that exhibit genuine cooperation during investigations and actively integrate these clawback policies could see reduced penalties. The DOJ is serious about championing corporate honesty, ensuring that those at fault face the consequences.

The clock is ticking for private and public enterprises to become prepared for this paradigm shift.  These agencies will recalibrate both the reporting strategy and pay structure for executives. Firms can embrace these changes by reviewing their ethical policies and standards as well as their fiscal clarity.  In the end, these new regulations should preserve companies’ esteem based on higher ethical standards thereby increasing stakeholder confidence.

These are not merely regulatory tweaks. Strategic inflection points will be designed to steer corporations towards heightened responsibility, authenticity, and openness. The regulations highlight the pressing need for a progressive shift in corporate ethos and the pivotal role executives must play in that transformation.

Implications For Executive Compensation

The new clawback regulations pose a game-changing challenge to your executive compensation structure.  As we reported in “Executive Compensation Trends,” in the recent past performance-linked bonuses became crucial elements meant to motivate executives to enhance company performance and increase shareholder value.  Executive compensation had shifted from a basic salaried structure to incentive-based compensation created to drive productivity.  An executive would be entitled to a year-end bonus only if the EBITDA or the operations’ efficiency in earnings met set performance goals. Some executives began to find ways to enhance mere numbers rather than true profits.

If your compensation is primarily incentive-based, the new rules demand your immediate attention. It’s no longer business as usual.  Many companies already are racing against time, meticulously re-evaluating and potentially overhauling their executive compensation models to remain compliant.

And here another a wake-up call for executives: The required refund of wrongly awarded incentives will not be contingent solely on misconduct or blatant oversight failures anymore.  In addition to such penalities, the new regulations shift the burden to executives to self-report any compensation that does not meet the new standards.  This new approach will require an acute sense of vigilance and profound comprehension of the unfolding regulatory nuances. Any failure to report a possible event that could constitute wrongdoing, even unintentional, could have grave financial implications for your earnings.

Your power will lie in not just understanding the new regulations but in actively engaging in the new process. By staying up-to-date with the expanded clawback regulations and taking a hands-on role in corporate governance and compensation dialogues with your financial officers, you will stand a better chance within your company to shape fairer, transparent, and balanced pay strategies.

A proactive, well-informed stance is your best armor in this rapidly shifting regulatory terrain. By equipping oneself with knowledge and assertiveness, you can safeguard your earnings and transition into the transforming corporate ethos.

Real-World Examples of Clawback Regulations

As detailed in an article published by the Society for HR Management, public companies that do not update or enhance their clawback policies for executive compensation risk becoming delisted from the stock exchanges.  One attorney observed that “it’s a pretty punitive result.”

Recent cases illustrate the tangible need for clear standards to enforce a company’s clawback policies.  In one notable case, Hertz filed suit against two of its senior executives for gross negligence mismanagement and alleged that the executives had breached the company’s standards of business conduct.  However, a federal district court ruled in June that a policy with a clawback provision by itself was not binding.  Only by a true contract with the executives could Hertz recover the $56 million dollars paid out to the executives.  Now, such wrongdoing will be enforceable through the new regulatory provisions.

On the other hand, regulatory violations by executives with Goldman Sachs led to a substantial settlement of 2.9 billion dollars.  Goldman Sachs ability to recoup the funds via the regulatory violation, as opposed to a policy violation as alleged by Hertz, emphasizes that companies are going to be inclined to use the new regulations to go after suspected wrongdoing by executives.

The Hertz and Goldman Sachs cases show how C-suite employees must meticulously abide by corporate governance standards and financial integrity to mitigate risks associated with non-compliance with evolving clawback regulations.

Consult an Executive Compensation Expert

As December 2023 fast approaches, executives and companies alike will face the federal agencies’ implementation of new clawback rules. Navigating this evolving terrain requires expertise and foresight.

At Gardner Employment Law, we can help guide executives through these regulatory intricacies, ensuring their compensation remains both compliant and competitive. Contact us today to learn more about the new clawback regulations.

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