Clawback Compliance Unleashed: How Stock Ownership Guidelines Can Help You Tame the Beast

As a public company executive or Board member, you’re likely familiar with stock ownership guidelines. These are policies that require executives or Directors to own a minimum amount of company stock within a specified time. The purpose of these guidelines is to align the interests of executives and shareholders, and to demonstrate long-term commitment to the company.

But did you know that stock ownership guidelines can also help you recover compensation under a clawback policy? A clawback is a provision that allows the company to recoup incentive-based compensation from executives in certain circumstances, such as financial restatements, misconduct, or performance failures. The Dodd-Frank Act of 2010 requires public companies to adopt clawback policies that cover at least three years of incentive-based compensation for current and former executives.

However, enforcing clawback policies can be challenging, especially if executives have already sold or transferred their shares. That’s why some companies have adopted net-retention as an enforcement mechanism for their stock ownership guidelines. A net-retention feature typically requires executives to retain a specified percentage of the shares received from equity awards until they meet their ownership guideline. Net shares are the shares remaining after paying taxes and exercise costs (if applicable). For example, if an executive receives 10,000 restricted stock units that vest after three years and has to retain 50% of the net shares until meeting their ownership requirement, they will have to keep 3,000 shares after vesting (assuming a 40% tax rate). This way, even if they sell some shares after meeting their ownership guideline, they will still have some shares left that could be subject to clawback.

So, a net-retention feature can help ensure that executives have enough shares available for recovery under a clawback policy. It can also reduce the risk of executives selling their shares too soon after receiving them, which could undermine the alignment and retention objectives of equity awards.

If your company does not have a net-retention feature in its stock ownership guidelines, you may want to consider adding one. It can be an effective way to enhance your governance practices and protect your shareholders’ interests.

At Equity Abacus, we can help you maintain stock ownership guidelines that suit your #corpgov goals. We are the leading provider of software solutions that streamline and automate stock ownership guideline compliance. Our platform helps you monitor executive share ownership levels, track progress toward meeting guidelines, generate personalized compliance statements and disclosures, and more.