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Pay Governance LLC is an independent firm that serves as a trusted advisor on executive compensation matters to board and compensation committees. Our work helps to ensure that our clients' executive rewards programs are strongly aligned with performance and supportive of appropriate corporate governance practices. We work with over 400 companies annually, are a team of nearly 70 professionals in the U.S. with affiliates in Europe and Asia with experience in a wide array of industries, company life cycles and special situations.

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Current Issues in Executive Compensation

Pay Governance understands that times remain uncertain. Our domain expertise remains executive compensation consulting. Therefore, each week we will continue to provide you with a short newsletter to keep you abreast of developments in the executive remuneration world.

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Featured Viewpoints

Clawback Rule Published in Federal Register – What it Means

The Securities and Exchange Commission (SEC) published its final clawback rule in the Federal Register on November 28, 2022, which establishes the following deadlines:

The stock exchanges are required to update their listing standards to incorporate the SEC’s final clawback rule no later than 90 days after the publication date, or February 27, 2023.

  • The SEC rule includes the minimum requirements for establishing a compliant clawback policy and each exchange has the discretion to incorporate more rigorous provisions.

The stock exchanges’ updated listing standards must become effective no later than one year after publication or November 28, 2023.

Companies have 60 days from the effective date of the listing standards to adopt a compliant clawback policy; assuming the exchanges set the effective date as of November 28, 2023, companies will need to adopt a compliant clawback policy no later than January 27, 2024.

Incentive-based compensation (as defined under the rules) earned by current or former executive officers based on the attainment financial measures (including stock price or TSR measures) for fiscal years ending after November 28, 2023 or compensation granted, earned, or vested on or after November 28, 2023 is covered by the clawback rules.


This Viewpoint is intended to inform compensation committees, executives, and compensation professionals about developments that may affect their companies; it should not be relied on as specific company advice or as a substitute for legal, accounting, or other professional advice.
General questions about this Viewpoint can be directed to Mike Kesner (

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Featured Viewpoint

SEC Finalizes New Clawback Rules

Introduction and Background

On October 26, 2022, the Securities and Exchange Commission (SEC) adopted the final rule requiring that all listed companies adopt and disclose a clawback policy as required under Dodd-Frank. These final rules follow the SEC’s issuance of proposed rules in July 2015, which laid dormant until the re-opening of two separate comment periods in October 2021 and June 2022.

The new clawback rule requires that a listed company adopt and disclose a policy for the recoupment of incentive compensation from its current and former executive officers in the event the company is required to prepare “an accounting restatement due to material noncompliance” under the securities law (colloquially referred to as a “clawback” policy).

The final rule also requires national exchanges to prohibit the listing of any security of an issuer that does not develop and implement a clawback policy that complies with the new rule.

Recap of the Final Rules

The key provisions of the final clawback rules include the following:

Covered Group

  • Applicable to current and former executive officers (Sec. 16 definition) who received incentive-based compensation during the three fiscal years preceding the date of the restatement
  • Newly appointed executive officers are not subject to clawback for prior periods (this is a modification from the proposed rules)


  • Restatements that correct errors that are material to previously issued financial statements (“big R” restatements), or
  • Restatements that correct errors that are not material to previously issued financial statements but would result in a material misstatement if (i) the errors were left uncorrected in the current report or (ii) the error correction was recognized in the current period (“little r” restatements)

          - Excludes “out of period” adjustments (corrections of immaterial errors recorded in the current period)

          - Excludes revisions due to internal reorganizations impacting reportable segment disclosures or changes in capital structure (e.g., stock splits, stock dividends, etc.)

No Fault

  • The recovery of compensation must be made on a “no fault” basis, without regard to whether any misconduct occurred or an executive officer's responsibility for the misstated financial statements

Recovered Amount

  • The amount of the recovered incentive compensation, calculated on a pre-tax basis, is the amount that exceeds what the executive officer would have received based on the restated financial statements
  • In the case of incentive compensation that was based on total shareholder return (TSR) or stock price, companies may use “reasonable estimates” to determine the impact of the restatement on TSR or stock price to determine the recoverable amount

           - This calculation must be filed with the applicable exchange

  • The rules do not require a clawback if it is determined by the Compensation Committee or Board of Directors to be impracticable. The SEC defines impracticable to be situations where the direct cost of hiring a third-party, such as a lawyer of consultant would exceed the amount to be recovered or if the recovery would violate home country law

           - To avail itself of this exception, a company must make a good faith attempt to recover the erroneous compensation and document the cost of recovery

           - In the case of a violation of home country law, the company must obtain a legal opinion from counsel that a recovery is impermissible under local law

Definition of Incentive Pay

  • Incentive-based compensation is defined as any compensation that is granted, earned, or vested based upon the attainment of a financial reporting measure used in the Company’s financial statements or non-GAAP measures, metrics, and ratios, plus stock price and total shareholder return (TSR)
  • The final rules do not apply to time vested stock options, time vested restricted stock/units, base salaries, tax qualified retirement plans, or discretionary/subjective bonuses not linked to attainment of financial measures, including bonuses tied to operational/strategic measures

            - We suggest companies review the representative list of operational and strategic measures provided by the SEC in the final rule to evaluate which of its existing financial measures might be subject to clawback (e.g., an increase in same store sales is considered a financial metric, whereas an increase in store openings is considered an operational metric)

Disclosure Requirements

  • Policy : Must be disclosed as an exhibit to an issuer’s annual 10-K
  • Execution : Companies are required to disclose in the proxy:

           - Date required to prepare the accounting restatement;

           - Aggregate dollar amount of clawback and analysis of how the amount was calculated;

           - Aggregate amount that remains unrecovered at the end of the current fiscal year;

           - If the clawback is attributable to incentive compensation based on stock price or TSR, the estimates used to calculate the clawback amount and methodology used; and

           - Amounts owed by each executive officer that is outstanding more that 180 days or longer

  • The SEC allows aggregate disclosure for executive officers who were not NEOs to protect their privacy
  • Disclosure of recovered amounts will be in a new column on the Summary Compensation Table and reduce the “total” and applicable column (e.g., non-equity incentive plan) amounts
  • Checkbox: in addition to the above disclosure, the 10-K must include two new checkboxes on the face of the 10-K

           - One checkbox indicates whether prior year period financial statements included in the filing have been restated

           - The other checkbox indicates if a restatement triggered a clawback during the current fiscal year

Board/Committee Discretion

  • Limited discretion: Issuers must recover incentive compensation unless the recovery is determined by the Compensation Committee (or independent Board members if there is no Compensation Committee) to be impractical (as discussed above); Boards do have discretion as to the means of recovery (e.g., setting up a deferred payment plan for recovered amounts), but are required to act promptly

Indemnification Prohibition

  • Indemnification of executive officers against the loss of incentive compensation is prohibited
  • Companies are also prohibited from reimbursing executives for premiums paid for third-party insurance

Lookback Period

  • Lookback period starts on the date the issuer (board, committee, or management) concludes that a restatement is required (or should have known a restatement was required) or a regulator, court or other legally authorized entity determines a restatement is required by the issuer

Effective Date

  • The stock exchanges have 90 days after the final rule is published to update their listing standards to include the clawback policy requirement. The listing standard must be effective no later than one-year following the publication date in the Federal Register. Companies will be allowed a 60-day grace period to adopt a clawback policy following the effective date established by the applicable exchange
  • Transition Period: The final rules provide that each company is required to comply with the recovery policy for all incentive-based compensation (i) received or (ii) granted, earned, or vested by current or former executive officers on or after the effective date of the applicable listing standard (as opposed to the effective date of the rule). Compensation agreements entered prior to the effective date are not grandfathered

SEC Clawback Rules-Implications and Considerations

Companies will need to adopt new or review and amend existing clawback policies, to comply with the new rules. Some of the changes might require:

  • The inclusion of all active and former executive officers — not just the executive officer(s) whose misconduct led to the restatement;
  • The removal of Compensation Committee or Board discretion to pursue a clawback (unless the “impractical to do so” exemption applies) or determine the amount of clawback;
  • The inclusion of “little r” restatements as a clawback trigger; or
  • The adjustment of clawback trigger to ensure the policy would recover compensation regardless of fault or misconduct leading to a restatement.

This may also be a good opportunity to evaluate other aspects of existing clawback policies including whether (i) the clawback triggers should include misconduct, material violation of the company’s code of conduct, or action/inactions that led to significant reputational damage to the company or (ii) an expansion of incentive plan participants that would be subject to some or all the clawback triggers. For example, non-executives could be subject to the clawback trigger for a material violation of the company’s code of conduct, but not a restatement.

In addition, a recent Department of Justice (DOJ) memorandum on corporate criminal enforcement indicates one of the factors it will consider in evaluating remediation and the effectiveness of compliance programs will include whether compensation systems that are designed to deter and penalize misconduct and reward compliance, (i.e., clawbacks) are implemented. Thus, the inclusion of a general misconduct trigger in a clawback policy might help mitigate DOJ penalties and other actions.

A copy of the final SEC rule can be found here.

General questions about this Viewpoint can be directed to Mike Kesner ( or Lane Ringlee (

Featured Viewpoint

Illustrative Disclosure for the SEC's New PVP Rules


During the last week of August, the Securities and Exchange Commission (SEC) released its final set of rules regarding the mandated “Pay Versus Performance” (PVP) disclosure. The new rules are the culmination of various proposals by the SEC dating back to 2015 when the agency first responded to the Dodd-Frank legislative requirement. Pay Governance LLC prepared two recent Viewpoints summarizing our interpretation and analysis of the new disclosure requirements (see Pay Governance Viewpoint on Executive Compensation, SEC Releases Final Rules Regarding Pay-Versus-Performance (PVP) Disclosures dated August 31, 2022 and PVP Q&A: Our Interpretations of the New Pay for Performance Rules dated September 15, 2022).

We stated in the previous Viewpoints that we would supplement our commentary with follow-on analyses and insights regarding the disclosure rules, and this Viewpoint provides an example of both the required and allowed disclosure under the final rule. Regarding supplemental disclosures, the SEC has granted companies significant latitude to include “additional measures of compensation or financial performance and other supplemental disclosures provided such disclosures are clearly identified as supplemental, not misleading, and not presented with greater prominence than the required disclosure”.

Each company will need to decide the form and content of its own PVP disclosure and whether to include supplemental information based on company-specific circumstances, disclosure philosophy, newness of the rules, and other factors. For example, many companies may opt for a more conservative approach in their initial PVP disclosure given the newness of the rules, unresolved interpretative issues, and general reluctance to set a precedent for future disclosures that may not properly reflect the companies’ PVP relationship.

Illustrative PVP Disclosure

The required tabular disclosure, footnotes, and narrative included in this example have been supplemented with optional graphics to assist in visualizing the SEC’s 234-page final rule.

  • “Supplemental” column in the PVP table that lists the company’s relative total shareholder return (TSR) ranking compared to its TSR peer group used to vest performance stock units (PSUs)
  • Footnote to the PVP table that summarizes the key equity components included in the current year’s Compensation Actually Paid (CAP) amount
  • Six-year company and peer group absolute TSR to document the company’s 6-year performance in addition to the required 3 years
  • Graphic and narrative comparison of SCT total compensation and CAP
  • The narrative disclosure includes explanations of why CAP does or not track with each performance measure; the rule only requires a description of the relationship

Required Tabular Disclosure of PVP


1. To calculate CAP, the following amounts were deducted from and added to Summary Compensation Table (SCT) total compensation

(i) Reflects “all other compensation” reported in the SCT for each year shown.

(ii) Represents the grant date fair value of equity-based awards granted each year. We did not report a change in pension value for any of the years reflected in this table; therefore, a deduction from SCT total related to pension value is not needed.

(iii) Reflects the value of equity calculated in accordance with the SEC methodology for determining CAP for each year shown. The equity component of CAP for fiscal year 2022 is further detailed in the supplemental table below.

2. The non-principal executive officer (PEO) named executive officers (NEOs) reflected in columns (d) and (e) represent the following individuals for each of the years shown: C. MacArthur, F. Walters, P. Karlowicz, and T. Johnson.

Required Tabular Disclosure of Most Important Measures to Determine FY2022 CAP

The five items listed below represent the most important metrics we used to determine CAP for FY2022 as further described in our Compensation Discussion and Analysis (CD&A) within the sections titled “Annual Incentive Compensation” and “Long-Term Incentive Compensation.”

Supplemental Graphs

1. TSR: Company versus Peer Group

As shown in the chart below, the Company’s 3-year cumulative TSR is less than the companies included in our industry index. There are several reasons for this:

  • The Company’s TSR performance for the immediately preceding 3 years far exceeded the peers, and when the 6-year TSR is compared to peers, the Company has significantly outperformed the peers.
  • The TSR peer group’s returns are market cap-weighted, and 20% of the companies included in the peer set affected 65% of the weighted return. The Company’s TSR is in line with the unweighted returns.
  • The TSR peer group is based on the XYZ index, which reflects the Company’s industry sector; however, many of the companies included in the index are primarily U.S. based and were not as adversely affected by global uncertainty as the Company.

2. CAP versus TSR

As shown in the chart below, the PEO and other NEOs’ CAP amounts are aligned with the Company’s TSR. This is due primarily to the Company’s use of equity incentives, which are tied directly to stock price in addition to the company’s financial performance.

3. CAP versus Net Income

As shown in the chart below, the Company’s net income has steadily increased while the PEO and other NEOs’ CAP has varied significantly each year. This is due in large part to the significant emphasis the Company places on equity incentives, which are sensitive to changes in stock price. In addition, the Company does not use net income to determine compensation levels or incentive plan payouts.

4. CAP versus Company-Selected Measure (CSM)

The chart below compares the PEO and other NEOs’ CAP to our CSM, 3-year relative TSR (rTSR), which indicates there is a very strong relationship between rTSR and CAP. The peer companies used to calculate rTSR are included in the CD&A and include some, but not all, of the companies in the XYZ index. The selection criteria for the rTSR peer group are also included in the CD&A.

The Company’s rTSR determines the number of performance shares that vest for each 3-year cycle, ranging from 0% to 200%. In 2020, the PSUs earned equaled 38% of target; in 2021, the PSUs earned equaled 200% of target; and in 2022, the PSUs earned equaled 25% of target, which is a key driver of the amount of, and change in, CAP.

Because approximately 75% of the CEO’s equity incentives are earned based on rTSR and only 50% of the other NEOs are based on rTSR, the impact of rTSR on CAP — both positive and negative — is more pronounced for the CEO compared to the other NEOs. That is why, for example, 2021 CAP increased more for the CEO than the other NEOs and decreased by more in 2022.

5. SCT Total versus CAP

Although there is no requirement to compare SCT and CAP, the chart below shows SCT compensation has increased modestly while CAP has varied significantly between years. This is due to several factors:

  • SCT compensation is based on the grant date value of equity awards made during the year whereas CAP is based on the fair value of equity awards made during the year valued at yearend, plus the change in value of prior year’s awards, including awards granted in 2019, 2020, and 2021. Thus, CAP reflects all or portions of 4 years of equity awards while SCT compensation is based on only the 2022 equity award.
  • As discussed under the CAP versus CSM heading, a significant portion of the executive officers’ equity compensation is based on rTSR; in 2021, the company achieved 75th percentile rTSR, resulting in earned shares of 200% of target for the 2019-2021 performance period. This together with the company’s increase in stock price in 2021 resulted in a significant increase in CAP. SCT total compensation was not affected by changes in stock price or rTSR and therefore did not change much compared to 2020.


As noted in our previous Viewpoints, there are several activities companies should undertake now to get a head start on this extensive and complex disclosure requirement. The guidance included in this, and future Viewpoints will remain focused on providing our clients with the insights and information needed to comply with the new rules and to assist in framing their PVP story.


This Viewpoint is intended to inform compensation committees, executives, and compensation professionals about developments that may impact their companies; it should not be relied on as specific company advice or as a substitute for legal, accounting, or other professional advice.
General questions about this Viewpoint can be directed to Mike Kesner ( ) or Linda Pappas (

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