On October 26, 2022, the Securities and Exchange Commission (SEC) adopted final compensation clawback rules. These clawback rules direct the national securities exchanges and associations to require listed companies, with some exceptions, to develop and include a clawback policy as an exhibit to their annual report. The SEC clawback rules also require companies to include disclosures in their SEC filings if recovery under the policy is triggered.

The adoption of the SEC clawback rules affects the vast majority of publicly traded companies. Further, leaders must now consider the additional regulatory burden and potential complications of awarding compensation tied to financial results, such as performance measures.

Consider the clawback rules' implications

The expansive nature of the final SEC clawback rules may prompt public companies to reassess the design of their executive compensation programs, particularly regarding performance-based compensation. As a result, leaders may decide to retain executives by shifting compensation to time-based awards or base salary.

If organizations begin to decouple executive compensation from company performance metrics, this trend may reduce the alignment of executive pay with the interests of shareholders. Under IRS Code Section 162(m), all compensation paid to the top-five executive officers isn't deductible, whether performance based or not. The new clawback rules may dampen any further growth in the percentage of performance-based compensation as companies seek safer ground.

Leaders should work with their audit and compensation committees to ensure alignment on the adoption or updating of their clawback policies with timing of the final listing standards. Failure to conform to SEC clawback rules could result in default of the stock exchange listing standards and trigger a delisting review.

Learn more

Learn more about strategies to navigate SEC clawback rules and to develop your clawback policy. Contact Gallagher to assist you with best-fit approaches to paying your executives and complying with the new reporting requirements — to help your organization face the future with confidence.

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