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Governance 6 min read Published Updated Credibility 92/100

Governance Briefing — October 26, 2022

Exchange Act Rule 10D-1 requires listed issuers to adopt, enforce, and disclose clawback policies that recoup incentive-based pay after restatements, pushing finance, HR, and boards to tighten controls and testing.

Zeph Tech Research Lead

Research lead, Zeph Tech

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Executive briefing: On 26 October 2022 the SEC adopted final rules directing national securities exchanges to establish listing standards requiring issuers to adopt and enforce clawback policies for incentive-based compensation (Release No. 34-96159). The rules implement Section 954 of the Dodd-Frank Act and mandate recovery of incentive compensation received during the three completed fiscal years preceding a financial restatement due to material noncompliance. Issuers must file clawback policies, disclose application, and maintain controls to identify restatements and calculate recoverable amounts.

Key requirements

Under the final rules:

  • Exchanges must adopt listing standards within 90 days of publication, with issuers required to comply within 60 days of effectiveness.
  • Issuers must adopt written clawback policies covering current and former executive officers, applying to incentive-based compensation tied to financial reporting measures.
  • Policies must provide for recovery of compensation received during the three years prior to the date the issuer is required to prepare an accounting restatement (including “Big R” and “little r” restatements).
  • Recovery is required regardless of executive fault, unless impracticable due to cost, violation of law, or tax-qualified plan issues, with board documentation supporting any exceptions.
  • Issuers must file policies as exhibits to annual reports and provide detailed disclosure when recovery is triggered.

Non-compliance can result in delisting.

Governance and implementation

Issuers should establish governance structures to oversee clawback compliance:

  • Board oversight. Compensation committees should own policy approval, monitor restatements, and ensure recovery decisions align with listing standards.
  • Policy integration. Align clawback terms with employment agreements, equity award documents, and incentive plans.
  • Internal controls. Coordinate with finance and accounting teams to detect restatements promptly, calculate recoverable amounts, and track repayments.
  • Disclosure controls. Update disclosure controls and procedures to capture clawback events, footnote reporting, and Inline XBRL tagging requirements.

Outcome testing should confirm timely identification of restatements, accurate recovery calculations, and effective communication with affected executives.

Data and operational considerations

Key steps include:

  • Maintaining detailed records of incentive compensation awards, performance metrics, payout calculations, and vesting schedules.
  • Implementing systems to recalculate compensation based on restated financial measures.
  • Tracking recovery efforts, including repayment schedules, offsets, or cancellations of unvested awards.
  • Documenting board determinations when recovery is deemed impracticable.

Issuers should coordinate with payroll, tax, and legal teams to manage repayment logistics and potential tax adjustments.

Disclosure obligations

Issuers must provide disclosure in Form 10-K, proxy statements, and other filings, including:

  • Filing the clawback policy as an exhibit to Form 10-K.
  • Describing actions taken to recover compensation, amounts outstanding, and reasons for non-recovery where applicable.
  • Tagging disclosures using Inline XBRL.

Investors will scrutinise clawback enforcement, making transparent reporting critical.

Outcome measurement

To evidence effectiveness, issuers should track metrics such as:

  • Time from restatement identification to recovery initiation.
  • Percentage of recoverable amounts collected.
  • Frequency of exceptions granted and rationale.
  • Impact on incentive plan design and risk management practices.

Internal audit should review clawback processes post-restatement to identify control improvements.

Implementation roadmap

  1. Policy drafting: Update or create clawback policies aligned with SEC requirements and exchange standards.
  2. System readiness: Configure systems to track incentive compensation, simulate restatement impacts, and automate recovery calculations.
  3. Training and communication: Educate executives, HR, and finance teams on policy requirements and processes.
  4. Monitoring: Establish ongoing monitoring and periodic reviews to ensure continued compliance.

Sources

Zeph Tech helps issuers operationalise SEC clawback requirements by integrating policy governance, systems automation, and outcome monitoring that withstand listing standard scrutiny.

Tax and accounting considerations

Clawback recoveries can create complex tax consequences. Issuers should collaborate with tax advisors to address potential payroll tax adjustments, amended filings, and implications for executives’ individual tax returns. Accounting teams must evaluate whether recovered amounts affect compensation expense recognition or require restatement of previously reported metrics. Documenting the accounting treatment and audit trail helps defend against regulator or investor challenges.

Outcome testing should verify that tax corrections are processed accurately and that financial statements reflect recovery entries appropriately.

Coordination with global affiliates

Multinational issuers need to align clawback policies with local employment laws. Some jurisdictions restrict clawbacks, necessitating customised contractual provisions or alternative recovery methods (e.g., cancelling future awards). Companies should maintain jurisdictional matrices detailing legal constraints, translations of policy terms, and consultation requirements with works councils. Aligning global policies reduces operational friction when restatements affect foreign subsidiaries.

Scenario planning and tabletop exercises

Issuers should conduct tabletop exercises simulating discovery of a material misstatement. Scenarios should cover cross-functional coordination, communication with executives, board deliberations, disclosure drafting, and interactions with auditors. Recording lessons learned supports continuous improvement and ensures readiness for real events.

Technology enablement

Modern HRIS and equity administration platforms can automate aspects of clawback tracking. Issuers should evaluate whether existing systems can flag awards subject to recovery, simulate recalculations based on restated metrics, and integrate with payroll for repayment processing. Implementing workflow tools that capture approvals, document communications with executives, and generate audit trails streamlines compliance.

Outcome testing should verify system calculations through parallel manual checks and ensure user access controls prevent unauthorised changes.

Communications and culture

Clawbacks can affect morale if handled poorly. Organisations should develop communication plans that emphasise fairness and regulatory obligations. Providing executives with training on policy expectations and potential scenarios reduces surprises. Incorporating clawback awareness into ethics programs and performance reviews can reinforce the link between accurate reporting and compensation outcomes.

Legal teams should maintain decision logs for each restatement event, capturing board deliberations, cost-benefit analyses for potential exceptions, and correspondence with exchanges. These records will be essential if exchanges or the SEC question recovery decisions.

Regular benchmarking against peer policies can highlight emerging best practices, such as broader triggers or integration with misconduct provisions.

Compensation committees should document interactions with auditors and counsel to evidence diligent oversight during recovery processes.

Annual policy attestations from executives can demonstrate ongoing awareness.

Regular scenario drills reinforce readiness.

Implementation testing and stakeholder communications

Ahead of NYSE and Nasdaq listing-standard deadlines, issuers should rehearse the full clawback workflow. Finance teams need playbooks for identifying restatement triggers (both Big R and Little r), calculating recoverable amounts across cash and equity awards, and coordinating with payroll to suspend future payouts. Human resources must maintain award-level data so compensation actually paid can be recalculated quickly, while legal teams document reasonable estimates when recovery from former executives is impracticable.

Governance committees should receive quarterly reports detailing clawback readiness metrics: inventory of covered executives, policy acknowledgements, reconciliation of incentive plans to financial metrics subject to restatement, and monitoring of indemnification prohibitions. Internal Audit can test disclosure controls by simulating a restatement scenario, verifying that the Form 10-K and proxy statement include the required checkboxes, narrative explanations, and Inline XBRL tags.

Finally, align stakeholder communications. Investor relations, corporate communications, and HR must craft messages that explain the policy, address potential morale concerns, and reinforce ethical expectations. Maintaining transparent engagement with auditors and compensation consultants will help boards demonstrate that their oversight of incentive pay and financial reporting risks meets SEC expectations.

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