Section 954(b) Disclosure and Adoption of Mandatory Recoupment Policies
- 954 (b) also requires, by rule, that publicly traded companies disclose the issuer’s policy on incentive-based compensation. This requirement attaches, specifically, in the event the issuer is forced to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws. As a result, the issuer is able to recover monies from any current or former executive officer who received incentive-based compensation (including stock options awarded as compensation) during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement (based on the erroneous data), in excess of what would have been paid to the executive officer under the accounting restatement.
There are several reasons for this legislation and consequences alike. First and foremost, it is elemental that disclosure for the incentive-based compensation is made visible in order to help accomplish the transparency issues that we are dealing with during the most recent financial crisis. In defining, “incentive-based compensation” it is difficult to pinpoint the interpretation that will be used by the individual boards and/or committees. However, we find the payment scheme as any form of compensation which is contingent upon the achievement of one or more pre-determined and objective “performance goals” that expressly relate to and are derived from one or more financial or stock price metric set forth in an issuer’s financial statements filed with the Commission.
Boards of directors should also be provided with the ability to determine the “excess of what would have been paid to the executive officer under the accounting restatement” as required under the Act. This is not defined in the Act, and we believe that it would be best left up to each board of directors to determine the excess payment under this provision as suitable to the individual situation. It may prove quite difficult to measure the value of the prior award an executive received in order to ascertain the amount that would have otherwise been paid under the restatement, therefore, allow the compensation committee to assess what actions it would have taken under restated results.
§10D(b)(2) directs that an issuer’s Recovery Policy apply to incentive compensation that is received “during the 3-year period preceding the date on which the issuer is required to prepare an accounting restatement.” The SEC’s rules should recognize that issuers cannot necessarily subject past incentive compensation awards (whether paid in cash, stock options, or otherwise) to the Recovery Policy on a retroactive basis.