More companies are taking the initiative to disclose their internal clawback policies despite delays in the final rulemaking deadline by the Securities and Exchange Commission to the first half of next year. In a report published by executive compensation data firm Equilar, the disclosure practice among Fortune 100 companies increased from 17.6 percent in 2006 to 84.2 percent in 2011.

Under the Dodd-Frank Act, companies that do not disclose their clawback policies are prohibited from listing in any U.S. securities exchanges. “With such severe consequences, the prevalence of Fortune 100 companies with publicly disclosed clawbacks will continue to increase,” says the report.

Another trend gaining momentum among these companies is the additional effort in place to change or implement their clawback policies. In fiscal year 2010 proxy statements, 95.9 percent of these companies adopted their policies since 2006. Within thzg group, 46.9 percent of them changed their policies and announced that they will take effect in either 2010 or 2011.

Not surprisingly, the study shows that 89 percent of those companies' policies have the provision to clawback compensation if the companies have to issue financial restatements. Over 79 percent of them said pay recoupment can also be triggered by unethical behavior among executives. In many cases, 73.6 percent of those companies stated that these two scenarios can overlap and will trigger salary recoupment. Other scenarios resulting in pay recoupment include ethical violations not related to financial restatements and termination of employment shortly after the exercise of stock options.

 

*Source: Equilar.

The clawback provision is affecting more than just companies' executives and directors, the report said. Since incentive plans are linked to clawbacks, both employees and directors who are plan participants are subject to pay recoupment in the event of wrongdoings.

Companies are also increasing the definition of pay elements subject to recoupment. In 2011, 87.9 percent of companies covered more than one compensation element. Cash and equity incentives are considered eligible for recoupment among 81.3 percent of Fortune 100 companies compared to 70.65 percent last year. The number of companies which state that they will recoup compensation other than the two mentioned increased to 23.1 percent this year against 16.3 percent previously.

Equilar said although disclosure related to pay recoupment has improved since the enactment of Dodd-Frank, the typical clawback policy adopted by companies still falls short of the standard set by the new law. Their criticism lays in the fact that current clawback policies did not cover incentive-based compensation.

In 2010, many clawback policies covered both cash and equity incentive compensation, but only approximately 25 percent specifically mentioned recovering compensation derived in the form of vested or outstanding options. In 2011, the number increased slightly to 28.6 percent.

“One reason for the apparent lag is the fact that the Securities and Exchange Commission has not yet released detailed provisions regarding the recoupment of compensation,” it said in a statement.