David I. Walker is Professor of Law and Maurice Poch Faculty Research Scholar at Boston University School of Law. This post is based on his recent paper, forthcoming in the Florida Tax Review. Related research from the Program on Corporate Governance includes Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).
Executive pay clawback provisions require executives to forfeit previously received compensation under certain circumstances, most notably after a downward adjustment to the financial results upon which their incentive compensation was predicated. Clawback provisions are on the rise. Limited clawbacks were mandated under the Sarbanes-Oxley Act of 2002. The Dodd-Frank legislation, enacted in 2010, mandated a much more comprehensive no-fault clawback regime, and the SEC is in the process of finalizing rules to implement the Dodd-Frank clawback. Meanwhile, the fraction of S&P 1500 companies proactively adopting clawback provisions more expansive than those mandated by SOX has increased from less than 1% in 2004 to 62% in 2013.
This paper focuses on the federal income tax consequences of clawbacks, specifically on the tax treatment of repayments by executives in cases in which the compensation repaid has been included in taxable income in a prior year. This is surprisingly under-explored terrain, particularly given that individual taxes can consume as much as 50% of executive compensation.
