Clawbacks growing in popularity

Risk mitigation tool also sees stronger policies among S&P/TSX 60 companies

Clawbacks growing in popularity
Pedestrians walk past the United States Securities and Exchange Commission in Washington, D.C. Credit: Andriy Blokhin/Shutterstock

Clawbacks are an integral risk mitigation tool, providing many Canadian companies with the ability to recoup or cancel undeserved incentive payments or grants that were made under a different understanding of company performance or individual behaviours.

The prevalence of clawbacks among the S&P/TSX 60 companies has increased considerably in the past five years.

In 2013, 59 per cent of the companies said they had clawbacks, compared to 95 per cent in 2018, according to S&P/TSX 60 proxy circulars.

Also in 2013, a number of companies that didn’t have clawbacks indicated in their proxies that they were still monitoring regulatory developments and market practices, as the U.S. Securities and Exchange Commission (SEC) had yet to finalize Dodd-Frank clawback requirements.

Fast-forward to 2018, and many have initiated clawbacks despite the lack of SEC guidance. No doubt, the influence of institutional investors and proxy advisers — strong advocates of publicly traded companies implementing clawback policies to discourage excessive risk-taking — played a role. For example, Institutional Shareholder Services (ISS) considers whether a company has such as policy among its primary evaluation factors for executive pay.

Double triggers

Misconduct leading to material reinstatement: 2018 - 67%; 2013 - 47%

Material reinstatement alone: 2018 - 31%; 2013 - 16%

Misconduct alone: 2018 - 41%; 2013 - 19%

The most prevalent clawback provision in both 2013 and 2018 was the “double trigger” which requires a material financial restatement caused — at least in part — by misconduct. Its use has grown by 20 percentage points in that five-year period.

Prevalence of clawback triggers

“Single trigger” policies requiring only material restatement or misconduct have also become much more common, doubling in prevalence in the past five years.

In particular, clawback policies tied to employee misconduct have become almost as common today (41 per cent) as double-trigger polices were five years ago (47 per cent).

Misconduct triggers cover a wide range of activities detrimental to a company. These include gross negligence, intentional misconduct, fraud, theft or violation of the employee code of conduct, along with actions that cause material financial, operational or reputational harm to the company.

Seven S&P/TSX 60 companies (12 per cent of the total) have made changes to the triggers since 2013. Two switched from a double-trigger policy requiring both misconduct and a material restatement to a single-trigger policy involving either misconduct or material restatement. The other companies added a single trigger to their existing clawback policies.

These changes provide the company or board with more levers to initiate a clawback where warranted.

Among other policy changes observed, two companies broadened the compensation covered by the clawback from just the annual incentive plan to both annual and long-term incentives. One of those two companies also widened the coverage of the policy to include all senior executives rather than just the CEO and CFO.

Evolution in thinking

The introduction of changes to Canadian clawback policies reflects an evolution in thinking that considers internal policies, peer practices and investor feedback. For example, Glass Lewis recently updated its policy to state it not only considers whether a clawback policy is in place but looks at the specific provisions.

The changes are also a reaction to a number of prominent situations where companies have suffered reputational harm due to bad executive behaviour, and boards want the flexibility to address these circumstances. 

The changes in the policies reflect an attempt to strengthen the clawback provisions, which should increase their ability to deter improper behaviour.

The stronger clawback policies share many of the following characteristics:

• There is a wider array of compensation that is subject to potential recoupment such as stock gains and deferred compensation.

• They apply to a broader group of executives than just the CEO and CFO.

• There is more mandatory enforcement of the clawback, which in turn diminishes the board’s use of discretion in applying a clawback. The increased likelihood of a clawback will increase the deterrent effect. That said, many boards prefer to retain discretion on the imposition and extent of clawbacks to address the specific circumstances of any particular situation while balancing the need to provide a degree of certainty or clarity to executives where a clawback might be enacted

• There are clearly defined look-back periods for a company to recoup compensation that has been paid or vested (for example, two to three years). Many policies do not specify the look-back period as it is left to the board’s judgment, which may lead to a shorter look-back period.

• There is a broader range of events that can trigger a clawback. As part of this trend, we are seeing the shift from double trigger to single trigger clawback policies. Additional triggering events may be specified such as breach of post-employment agreements. On the flip side, there are fewer limitations on the triggering on the clawback, such as requiring intentional misconduct or materiality, which would also broaden the triggering events.

How are companies proceeding?

While many companies initially introduced a clawback policy to satisfy regulations or investor feedback, more companies are now considering the details of their policies and considering ways to enhance their effectiveness as a risk management tool. This will entail reviewing current policies against peer best practices, weighing the pros and cons of potential changes to strengthen the policy, while ensuring it treats executives fairly. 

Ming Young is an executive compensation consultant based in Willis Towers Watson’s Toronto office. Email or

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