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Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

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Working Paper

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Boston University School of Law




The SEC has recently released final rules implementing the executive incentive compensation recovery or “clawback” provisions of the 2010 Dodd-Frank Act. These rules are aimed at recovering from executives incentive compensation determined to be excessive in light of a subsequent accounting restatement. Unfortunately, the SEC’s rules create a loophole by excluding purely time-vested stock and stock option grants from the reach of the new clawback regime. This aspect of the rulemaking seems inconsistent with the intent of Congress, and the result likely will be to distort executive pay practices in a perverse fashion, shifting compensation back in the direction of the time-vested stock option heyday of the late 1990s and early 2000s. As such, the SEC’s decision is also regrettable as a policy matter. In addition to exempting a large fraction of incentive compensation from the reach of the clawback, a renewed emphasis on time-vested options would reverse a salutary trend in executive compensation design in favor of more tightly performance-conditioned pay instruments that create incentives over a broader range of market conditions than time-vested options, often reward executives only when they outperform their peers, and minimize executives’ ability to use inside information to maximize their compensation. To be sure, institutional investors and proxy advisory firms that embrace serious linkage between pay and performance may resist firms backsliding into heavy usage of time-vested stock and options, but given the risks to executives and the cost to firms of issuing compensation instruments subject to the new clawback, I am not optimistic.

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