Governance

Clawback Policy

A company’s policy for recovering incentive-based compensation already paid, most commonly triggered by an accounting restatement.

A clawback policy is a company’s stated mechanism for recovering incentive-based compensation that has already been paid to an executive, most often after an accounting restatement. Every U.S.-listed company has been required to adopt a policy of this kind under Dodd-Frank Section 954, the SEC rule implementing it and the listing standards at the NYSE and Nasdaq. The mandatory version is not fault-based: it triggers on the restatement, whether or not the executive did anything wrong.

A clawback policy is a company’s stated mechanism for recovering incentive-based compensation that has already been paid to an executive. For U.S.-listed companies it is not optional: Dodd-Frank Section 954 directed the SEC to require recovery of erroneously awarded compensation, and the resulting rule, Exchange Act Rule 10D-1, together with the listing standards it produced at the NYSE and Nasdaq, made a compliant policy mandatory for every listed issuer, with the requirements taking effect in 2023.

The mandatory policy reaches incentive compensation tied to a financial reporting measure, and that category is broader than an annual bonus tied to revenue or earnings. The rule treats stock price and total shareholder return as financial reporting measures, which brings performance equity into scope alongside cash incentives.

It also reaches past the executive who signed the numbers. The policy applies to incentive compensation received by current and former executive officers during the three completed fiscal years immediately preceding the date the company is required to prepare a restatement, and recovery is required reasonably promptly once the excess is determined.

The policy is not fault-based. Recovery is triggered by the restatement itself, whether the executive caused the error, missed it, or had no involvement in it at all. That is a different question from the enforcement and liability issues a misstatement can separately raise, and a policy that recovers nothing because no one was found at fault is still being applied as written.

Two kinds of restatement count. The rule covers a "Big R" restatement, which corrects a material error in previously issued financial statements, and a "little r" restatement, which corrects an error that is not material to those statements but would be material if left uncorrected in the current period. A company cannot narrow its policy to only the more serious of the two.

What is recoverable is the excess: the incentive compensation received that would not have been received had the amount been calculated on the restated figures, determined on a pre-tax basis. A company may not indemnify an executive against that loss, and may not pay or reimburse the cost of insurance that would cover it.

The rule permits only narrow exceptions, and a company that declines to recover must explain which one applies. They are limited to cases where pursuing recovery would be impracticable because the direct expense of enforcement would exceed the amount recoverable, because recovery would violate a home-country law in force before the rule took effect, or because it would cause a tax-qualified retirement plan to fail to meet the requirements of the Internal Revenue Code.

Separately, many companies layer a broader discretionary policy on top of the mandatory one, extending recovery to misconduct, risk failures, or compensation tied to measures that are not financial reporting measures. The mandatory policy itself is filed as an exhibit to the annual report, and disclosure of a restatement that required recovery, including any amount still unrecovered, appears in the proxy under Item 402(w) of Regulation S-K. Section 304 of the Sarbanes-Oxley Act remains a separate and narrower recovery provision that applies to the chief executive and chief financial officer after a restatement caused by misconduct.

How it works

A restatement becomes required
The company concludes that previously issued financial statements contain a material error, or an error that would be material if left uncorrected in the current period.
The lookback window is fixed
The rule reaches incentive compensation received by current and former executive officers during the three completed fiscal years before the date the restatement is required.
The excess is recomputed
Incentive pay is recalculated against the restated financial figures, and the difference between what was paid and what the restated numbers support is the recoverable amount, determined pre-tax.
Recovery is pursued
The company must recover reasonably promptly, from former officers as well as current ones. Indemnification and insurance for the loss are prohibited.
Any exception is explained
Where recovery is impracticable, the company must identify which of the narrow permitted exceptions applies rather than simply declining to recover.
The policy and the outcome are disclosed
The policy is filed as an exhibit to the annual report, and Item 402(w) of Regulation S-K calls for disclosure of a restatement that required recovery and any amount still outstanding.

In practice

A clawback provision as its fields are disclosed.

Recovery type Whether recovery is mandatory or left to the board’s discretion.	Discretionary
Applies to The officer whose terms carry the provision.	Chief Executive Officer
Source filing The filing type in which the provision appears.	8-K
Filing date The date the filing was made.	January 9, 2023

MarketAxess's disclosed clawback provision leaves compensation recovery to the board or committee's discretion, without further specifics on triggers or amounts, as the agreement states it.

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Where it appears

Exhibit 97 to the annual report on Form 10-K: The text of the mandatory recovery policy a listed company has adopted under the exchange listing standards.
Item 402(w) of Regulation S-K, in the proxy statement or annual report: Disclosure of any restatement that required recovery, how the recoverable amount was determined, and any amount still unrecovered at period end.
The Compensation Discussion and Analysis: How the compensation committee applies the policy, and how it relates to the company’s broader approach to incentive pay.
A standalone discretionary clawback policy, where the company maintains one: Terms that go beyond the mandatory rule, such as recovery for misconduct or for compensation tied to non-financial measures.

Mandatory clawback vs. discretionary clawback

The two are often described with the same word, but they are separate policies with different triggers and different reach.

	Mandatory clawback	Discretionary clawback
Trigger	An accounting restatement, with or without misconduct	Whatever the company names, commonly misconduct, a risk failure, or a policy breach
Fault required	None; the restatement alone triggers recovery	Usually a finding or determination by the board or a committee
Compensation covered	Incentive pay tied to a financial reporting measure, including stock price and total shareholder return	Any element the policy names, which can include time-based equity and salary
Lookback period	The three completed fiscal years before the restatement is required	Whatever period the policy states
Who is covered	Executive officers, current and former	Whichever employees or officers the policy names
Recovery decision	Required, subject to narrow impracticability exceptions	Discretionary
Where it appears	Filed as an exhibit, with Item 402(w) disclosure of outcomes	Described in the CD&A, the policy, or the employment agreement

Common misreadings

Reading a clawback policy as fault-based — the mandatory rule recovers incentive pay after a restatement whether or not the executive was responsible for the error.
Assuming a policy reaches only unvested equity still held — the mandatory rule reaches incentive compensation already paid, not just awards that have not yet vested.
Treating the existence of a policy as evidence that a recovery has occurred — a policy is a standing commitment, and an actual restatement and recovery is a separate disclosure.

Frequently asked

What triggers a clawback policy?

For the mandatory policy every U.S.-listed company must have, the trigger is an accounting restatement, whether the error was material to the previously issued statements or would have been material if left uncorrected. A company’s own discretionary policy may name additional triggers, such as misconduct or a risk failure, but those are additions to the required trigger rather than replacements for it.

Does a clawback require that the executive did something wrong?

No. The mandatory policy is not fault-based: recovery follows from the restatement, not from a finding about the executive’s conduct. A company may separately maintain a discretionary policy tied to misconduct, and Sarbanes-Oxley Section 304 involves a different and narrower reimbursement provision, but neither changes the fact that the required policy operates without regard to fault.

How far back does a clawback reach?

The mandatory policy reaches incentive compensation received by current and former executive officers during the three completed fiscal years immediately preceding the date the company is required to prepare the restatement. A company’s discretionary policy sets its own period, and a reader checking a specific company should confirm which policy is being described.

Can a company decide not to recover the compensation?

Only within narrow limits. The rule permits a company to forgo recovery when pursuing it would be impracticable because the direct expense of enforcement would exceed the amount recoverable, because recovery would violate a home-country law in force before the rule took effect, or because it would cause a tax-qualified retirement plan to fail to meet Internal Revenue Code requirements. Where one of those applies, the company must say so.

Where is a clawback policy disclosed?

The mandatory policy is filed as an exhibit to the company’s annual report, and the proxy discloses any restatement that required recovery along with any amount still outstanding under Item 402(w) of Regulation S-K. A broader discretionary policy is usually described in the Compensation Discussion and Analysis, and sometimes also in an employment agreement.

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