In some cases, Minnesota law permits companies to require CEOs and executives to return compensation they have already received. This article explains how companies can reserve the right to claw back certain compensation to CEOs and other executives.
Taking Back Wages Already Paid to Employees
You may have read in the news where CEO compensation is clawed back, requiring CEOs to give up compensation their companies have already given to them. This compensation is often a right to future pay, such as a “golden parachute” or stock options, rather than wages already paid in payroll.
For example, in this story, the Wells Fargo CEO was required to give up compensation he would have been entitled to under his executive compensation agreement with the bank. These so called “clawback provisions” are increasingly widespread.
In a sample of S&P 1500 firms, reported clawback usage climbed from less than 1% in 2000 to over 50% in 2012. The growing prevalence of these provisions is due to laws, such as the Sarbanes-Oxley Act, which requires the SEC to pursue the repayment of incentive compensation from executives knowingly involved in fraud. The more recent Dodd-Frank Act, expanded the SEC authority by mandating public companies to include a clawback triggered by fraud, regardless of the executives’ complicity.
Tips for Writing a Clawback Provision
Here are a few tips for writing a clawback provision in an employment contract:
- Executive compensation employment agreements should list circumstances that are a material breach of the contract
- Executive compensation employment agreements should list remedies available to the company in case of material breaches, including the right to clawback compensation a CEO or other executive have already received
- Even without clear language in an employment contract, a creative litigation attorney can often find other arguments to claw back executive compensation, such as breach of fiduciary duties, gross misconduct, or, if the case is in bankruptcy court, creditor rights to a clawback under the U.S. Bankruptcy Code.
Clawback Provision Examples
There are countless examples of clawback provisions online.
Ford Motor Company – Executive Compensation Recoupment Policy (Exhibit 10.2 to 10-Q filed May 7, 2010)
On March 26, 2010, the Compensation Committee of the Board of Directors of Ford Motor Company formally adopted a policy of recoupment of compensation in certain circumstances. The purpose of this policy is to help ensure executives act in the best interests of the Company. The policy requires all Company officers to repay or return cash bonuses and/or equity awards in the event: (i) the Company issues a material restatement of its financial statements and where the restatement was caused by an employee’s intentional misconduct; (ii) the employee was found to be in violation of non-compete provisions of any plan or agreement; or (iii) the employee has committed ethical or criminal violations. The Compensation Committee will consider all relevant factors and exercise business judgment in determining any appropriate amounts to recoup and has the discretion to determine the timing and form of recoupment. The policy will apply to the Annual Incentive Compensation Plan beginning with the 2010 performance period and equity awards beginning with grants made in 2011.