According to an analysis by FW Cook of 2024 proxy filings, four out of five companies with a market capitalization of $10 billion or more require executives to return incentive compensation amounts and reasons that go beyond the scope of the clawback rules adopted by the U.S. Securities and Exchange Commission (SEC) effective since January.

Nearly 70% of these companies apply clawback provisions to a broader group of individuals than the so-called Section 16 officers under SEC rules. Section 16 officers include the president or CEO, CFO, chief accounting officer or equivalent, and any executive who plays a role in significant policy-making or oversees important business units. According to executive compensation consulting firm FW Cook, most large companies further extend the scope to all senior management or all incentive plan participants.

The analysis found that slightly less than 45% of companies extend clawback coverage to the entire senior management team, while 22% target all individuals participating in compensation plans tied to the company's financial performance.

These companies are also stricter than the SEC regarding the conditions that trigger clawbacks. The SEC requires companies to claw back when restating financial statements (whether a 'little r' revision or a 'big R' restatement), even if the restatement results from an error rather than misconduct. The clawback amount must be based on incentive compensation tied to the restated amounts. However, slightly less than 65% of companies extend clawback provisions to situations where executives engage in fraud or misconduct (whether or not it leads to a restatement); nearly one-third of companies claw back compensation when the company's reputation is damaged; and about one-quarter claw back compensation when executives violate company policies or codes of conduct.

These companies are also stricter regarding the scope of compensation subject to clawback. SEC rules are limited to compensation tied to financial performance, so only the portion related to restated amounts must be recovered. But nearly 70% of companies require executives to return a broader range of compensation types, such as cash and equity incentives (including time-based awards), depending on the nature of the issue.

The SEC does not directly enforce its clawback rules; instead, it requires the two major exchanges, Nasdaq and the New York Stock Exchange, to delist companies that fail to adopt mandatory clawback policies, making the exchanges the SEC's de facto enforcers.

FW Cook's analysis is based on proxy filings from 45 large companies. Among the 20% whose policies do not exceed SEC rules, one-third indicated plans to review their policies to consider adding additional requirements.

For companies that do go beyond the rules, general counsel play a role in ensuring that additional requirements do not conflict with SEC regulations. Mitchel Pahl, a partner at the law firm Katten Muchin Rosenman, has outlined approaches for in-house counsel to align their governance documents with SEC rules.