Clawbacks of Erroneously Awarded Compensation

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC; the full text is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

A few months ago, the baseball world celebrated the 90th birthday of Yogi Berra, the legendary former catcher and manager for the New York Yankees. Yogi Berra is well-known for his witty comments, often referred to as “Yogi-isms.” [1] Several come to mind today, as we consider another rulemaking related to executive compensation.

“Pair up in threes.”

Following our earlier efforts on hedging and pay versus performance, today’s proposal is the third relating to executive compensation that we have considered in 2015. The Commission has yet again spent significant time and resources on a provision inserted into the Dodd-Frank Act that has nothing to do with the origins of the financial crisis and affects Main Street businesses that are not even part of the financial services sector. Why does the Commission continue to prioritize our agenda with these types of issues, when rulemakings that are directly related to the financial crisis remain unaddressed?

While we must ultimately implement the Dodd-Frank Act, its special interest provisions for which Congress declined to provide any deadline should not take precedence over important crisis-related initiatives. Indeed, much of the efforts during my tenure as Commissioner has related to topics such as conflict minerals, resource extraction, and the CEO pay ratio. More recently, unforced errors by our Enforcement Division in steering more cases to administrative forums rather than federal courts have become an increasing and unnecessary distraction to the Commission’s important work.

“The future ain’t what it used to be.”

As I said previously, “a properly designed clawback rule could yield real benefits to shareholders.” [2] In my view, such a clawback policy would be straightforward to implement and would quickly recover from executives who fail to follow correct accounting procedures. It would be fully consistent with the Dodd-Frank Act, as well as the accompanying Senate report, which stated that the provision was intended to ensure that “shareholders do not have to embark on costly legal expenses” to recover losses. [3] Unfortunately, the broad approach of today’s proposal is likely to impose a substantial commitment of shareholder resources and, unintentionally, result in a further increase in executive compensation.

This is not the first time that statutes or rules relating to executive compensation have created unintended consequences. In 1993, Congress enacted Section 162(m) of the Internal Revenue Code in an attempt to restrain compensation. As our former chief economist Chester Spatt observed, the limit on tax deductibility of executive salaries created conditions for corporations to substitute riskier, performance-based awards as compensation. [4] But a dollar of fixed compensation is worth more than a dollar of risky, contingent-based compensation. Thus, total executive compensation increased substantially after the enactment of Section 162(m), despite the Congressional intent.

A similar result is likely to occur with today’s proposal. According to the release, the average issuer paid approximately 0.48% of its market value of equity to all named executive officers in the form of non-salary compensation. Our economic analysis notes that risk-averse executives prefer predictable compensation and that the proposal will introduce an additional source of uncertainty in compensation levels. Because the mandated recovery policy would be “no-fault,” a material accounting error would require executives to return excess incentive-based compensation even if they had no role in the error.

A recovery policy would introduce uncertainty in the amount of incentive-based compensation that executives will ultimately retain. Prior research and experience suggests that this uncertainty will increase total executive compensation. In particular, corporate executives may lower the value that they attach to the incentive-based component of their pay and demand an offset to bear the increased uncertainty.

“It’s déjà vu all over again.”

The Commissioners received the original discussion sheet outlining the staff’s thinking exactly one year ago today, on July 1, 2014. We then received the first draft of the proposal, having been prepared by the staff and approved by the Chair’s office, at the end of May. Up until two weeks ago, I was fully prepared to vote in favor of the proposal until significant changes were made that, in my opinion, were unsupportable.

In many ways, this process is all-too-familiar. A thoughtful proposal consistent with the statute is drafted by the staff, cleared by the Chair’s office, and discussed among the Commissioners. But at the very end, significant changes are agreed upon by the Chair’s office in ways that diverge from Congressional intent. This happened in pay versus performance, credit ratings and nationally-recognized statistical rating organizations, and swap data repositories and security-based swap data reporting.

There is a reason that a discussion sheet is circulated so far in advance—to allow for a deliberative process to occur among Commissioners and staff. Discussion sheets often generate reactions and new ideas that are incorporated into the draft proposal. For that reason, the ability to engage our economists, attorneys, accountants, examiners, and data specialists with additional lines of research and inquiry is critical to ensuring that the final work product represents the culmination of extensive deliberation and thought. Repeated instances of substantial eleventh-hour modifications by the Chair’s office deny the other Commissioners and the staff the benefits of such discussion.

“It ain’t over ‘til it’s over.”

Although I cannot support today’s proposal, it represents only the commencement of the comment period. There are a couple areas in particular that I am interested in public comment.

First, to the extent that implementation of the proposal entails fixed costs, smaller reporting companies and emerging growth companies will incur a proportionately greater compliance burden than larger issuers. In looking at the data, more than one-third of larger companies are already voluntarily disclosing an executive compensation recovery policy compared to only 2-4% for emerging and smaller companies. This difference raises questions as to whether investors in smaller and emerging companies desire such policies. I would like commenters, especially investors, to provide their thoughts on whether we should make recovery policies voluntary for emerging and smaller companies.

Second, today’s proposal requires the disclosures to be coded and tagged in XBRL format as a separate exhibit. This proposal, like pay versus performance, seeks to extend interactive data for proxy statements in a piece-meal fashion. Would it be better to have a more comprehensive approach to providing interactive data contained in the proxy statement, as well as the non-financial section of the annual report on Form 10-K, rather than adding individual items in an ad hoc manner?


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[2] Andrew Ackerman, “SEC Eyes Broadened ‘Clawback’ Restrictions,” The Wall Street Journal (Jun. 2, 2015).
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[3] Senate Report No. 111-176 (Apr. 30, 2010), at 136.
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[4] Chester S. Spatt, Financial Regulation: Economic Margins and “Unintended Consequences” (Mar. 17, 2006), available at
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