The latest 131-page guide for compensation committees from Wachtell Lipton is here. As always, the guide even includes a sample compensation committee charter at the back — with these wise words of caution:
It is not necessary that a company have every guideline and procedure that another company has to be “state of the art” in its governance practices. When taken too far, an overly broad or detailed committee charter can be counterproductive. For example, if a charter explicitly requires the compensation committee to review a particular type of compensation arrangement, meet a stated number of times each year or take other action, and the compensation committee has not taken that action, then the failure may be considered evidence of lack of due care. Therefore, we recommend that each company tailor its compensation committee charter and written procedures to those that are necessary and practical for the particular company.
This year’s guide also includes updated sections on “Dodd-Frank Act Compensation Clawback Rules” (pg. 46) and “Dodd-Frank Act Pay Versus Performance Rules” (pg. 10). The discussion on clawbacks identifies several questions to ask when crafting a policy that complies with the new rules, and goes on to note:
Over the past several years, prior to the adoption of the final SEC clawback rules, the prevalence of clawback policies increased dramatically, in part because many institutional investors have actively promoted the adoption of clawback policies. According to a recent study, 99% of 200 large publicly traded companies have disclosed that they maintain clawback policies, although most policies are discretionary and not mandatory.66 The study indicated that common clawback triggers include the following: ethical misconduct leading to a financial restatement (42% of policies); a financial restatement without a requirement of ethical misconduct (53%); ethical misconduct without a financial restatement (54%); violation of restrictive covenants, such as noncompetition, nonsolicitation, nondisclosure or nondisparagement obligations (25% of policies); reputational risk (20%); and failure to supervise (7% of policies).
For companies that have already adopted a clawback policy that is broader than the policy required by the final regulations, decisions will need to be made as to how to reconcile the existing policy with the newly mandated policy. Combining the two policies could lead to undesirable complications. In particular, most existing policies provide discretion to the compensation committee or board of directors as to whether to exercise the clawback, while the new regulations generally require the company to apply the clawback on a mandatory basis. Mandatory application is fundamentally inconsistent with the design of a broad discretionary policy, so a decision will need to be made as to whether to narrow the breadth of the existing policy, or, alternatively, to bifurcate the policy so that it includes both the mandatory clawback required by the final SEC rule and the optionality for the compensation committee or board of directors to continue to exercise discretion in determining whether to apply the existing clawback right. Other alternatives include maintaining two policies, or eliminating the existing policy altogether.
There’s a lot of work to be done on this topic before next year — both exchanges proposed listing standards last week which largely track Rule 10D-1.
– Liz Dunshee, CompensationStandards.com, February 27, 2023