Earlier this summer, JPMorgan Chase CEO Jamie Dimon told Congress that his $23.1 million pay was “100 percent” on the table for a possible clawback, after the company lost billions of dollars from bad trades. I hope it's not a nice table; that sounds like it could leave a scratch.

The CEO said the decision would be up to his board, which, by the way, he still runs. That's because, like many companies, JPMorgan has adopted its own clawback policy, which will soon be a requirement for all public companies under the Dodd-Frank Act, but such policies are already allowed under Delaware law.

We're still waiting on the Securities and Exchange Commission to implement the rule, but when it does it will require companies to have a policy that allows for incentive-based compensation to be recouped from current and former executives based on specific triggers, such as a restatement, an accounting fraud, blatant disregard of company policies, or driving a 158-year-old bank into the ground faster than you can say Dick Fuld.

Plenty of companies think the rule makes enough sense that they aren't waiting around for the SEC to implement clawback policies. A new report from executive compensation data firm Equilar finds that 87 percent of the Fortune 100 now have a publicly disclosed clawback policy and, of that group, 35 percent adopted or amended their clawback policy in 2011 or 2012, after the passage of Dodd-Frank. That tells us two things: One, these companies already think that clawbacks are a good thing, since they are adopting them voluntary. Two, sometimes it takes less time to actually implement a rule than for the SEC to make it.

First, let's applaud regulators for choosing such a colorful term. They could have called them “give-backs,” or “payups,” or “sorry-bout-thats,” but they went with “clawbacks.” Were the lawyers just bored that day? When I hear it, I imagine SEC Director of Enforcement Robert Khuzami morphing into some Teen-Wolf-like character and bounding down Wall Street, looking for fraudulent bankers to shred. Nevertheless, the term is scary sounding, and if you are intent on inflating the numbers to drive up your bonus, that's not a bad thing.

The idea was first put into the Sarbanes-Oxley Act of 2002, when regulators realized that for every Jeff Skilling and Bernie Ebbers they were carting off to the pokey, there were hundreds of other executives, who had already cashed in millions in stock options earned on inflated or otherwise tampered-with financials. (One can only hope some of them entrusted Bernie Madoff with their haul.) 

The clawback provision of the Sarbanes-Oxley Act was rarely used; the SEC invoked it fewer than a dozen times from 2002 to 2009. To put that in perspective, there were roughly the same number of no-hitters in Major League Baseball over that time. Naturally, regulators believed the clawback policy was working so well that they decided to expand the program in Dodd-Frank.

There are a host of questions and problems with this rule that are well explained by executive compensation lawyer Joseph Bachelder on the Harvard Law School Corporate Governance blog.

Do Clawbacks Work?

When the SEC does get around to implementing a clawback rule, will it work? Probably not as a deterrent. It's just hard to imagine a bunch of managers and accountants sitting around a conference room when someone says: “If only we could move some revenue back a few days, we could make our numbers …” And then, someone responding: “But if we do, and we get bonuses based on those numbers, the SEC might find out later that we cooked the books and take those bonuses back.” Just not going to happen. What does work as a deterrent? Prison. That always gets people's attention.

None of this means that the clawback provision is a bad idea. Very few people think that executives should continue to hold on to bonuses that were obtained under false premises, even if they didn't take part in the fraud, but just benefited from it.

SEC Commissioner Troy Paredes is one of those few people. In a speech last month to the National Conference of the Society of Corporate Secretaries & Governance Professionals, he said he is troubled that the Dodd-Frank regulatory regime goes too far. Among the Dodd-Frank rules he pooh-poohed was the clawback provision. He said it would result in cases where executives who have worked diligently and honestly could have to pay back a considerable portion of their compensation if the company has to restate because of an accounting error.

He's right about that. But if the gains are based on an accounting error, shouldn't they have to go back? If my bank mistakenly puts $2,000 in my account, no one thinks that I should get to keep it since I didn't have anything to do with the error. A more far-fetched analogy: If I'm at a magic show and my wristwatch mysteriously ends up on the arm of the guy sitting next to me, I might admire the trick and know he had nothing to do with it, but that guy is not going home with my watch. I'm clawing that baby back.

Paredes, however, did make some good points in his speech about the unintended consequences of clawbacks. He's concerned some companies might restructure incentive pay so that less of it is linked to financial targets. Most will agree that damaging the precious pay-for-performance link is a bad thing, even though some say it puts too much focus on short-term performance. But another bad thing is when companies are already counting on having to restate their financials when they put their incentive plans together. He's also worried that executives will demand more base pay to make up for the risks that incentive pay could be clawed back. Again, it makes more sense to work on lowering those restatement risks, which is the whole point of the clawback rule, rather than paying executives more for not addressing them. Of course, Paredes' concerns are real and the SEC should keep a close eye on the potential for these unintended consequences, but I would say they are symptoms to be addressed—not collateral damage.

Meanwhile, I fully expect the trend of companies voluntarily adopting clawback policies to continue. And some companies are even putting them into action. For example, while CEO Dimon's pay is “on the table,” JPMorgan said it would recoup incentive compensation from other executives involved in the trading losses in its London unit, and it has already recouped about two years of compensation from three London traders. Sure, the existence of JPMorgan's clawback policy didn't stop those traders from making the knuckle-headed trades—I can guarantee that clawbacks never even occurred to them. But we can all take a little solace knowing that the London Whale will be a little lighter in his pockets.

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