Whilst some executive remuneration policies may contemplate provisions to enable the company to recover/withhold incentive amounts under certain circumstances, they could soon become an ‘if not why not’ requirement under the latest proposed ASX Corporate Governance Principles. And if the long arm of the law wasn’t enough reason to rethink how an incentive would be adjusted/rescinded in the event of a material misstatement in the accounts, perhaps the increasing prevalence of CEO departures may give cause to dust off your executive incentive policy.
Fig. 1. A video clip from our March 2024 client forum regarding the prevalence of CEO departures
What is a “clawback” clause?
A clawback clause is often included in executive employment contracts, allowing an organisation to reclaim previously disbursed remuneration, incentive payouts or benefits from an employee. It typically grants the board and remuneration committee discretion to invoke the clause in instances such as misconduct or financial restatements, serving as a tool for risk mitigation.
Proposed new regulatory requirements for executive pay clawback
The ASX Corporate Governance Council recently released the draft 5th edition of the ASX Corporate Governance Principles and Recommendations, marking a significant update since the 4th edition from 2019. Notable changes to executive pay policies include explicit provisions for clawback mechanisms.
Proposed Recommendation 8.3 would require a listed entity to:
- Have remuneration structures that can clawback or otherwise limit performance-based remuneration outcomes of its senior executives after award, payment or vesting; and
- Disclose (on a de-identified basis) the use of those provisions during the reporting period.
The purpose of a clawback clause
A clawback clause is intended to serve as an accountability safeguard. It ensures that if inaccurate financial reporting or misconduct happens to occur within an organisation, it’s easier to amend any amounts already paid out. They apply to various forms of performance-based remuneration (incentives, bonuses) and require disclosure in company reports. Clawback provisions typically align with broader governance principles, and can signal a company’s commitment to fair and responsible remuneration.
ASX Insights: Clawback Adoption Rates and Sectoral Distribution
In recent years, we’ve seen the expanding scope of clawback provisions to encompass both Short-Term (STI) and Long-Term (LTI) incentive components. This evolution underscores the heightened focus companies are putting on aligning executive remuneration with performance outcomes. By including clawback clauses within multiple incentive components, companies are demonstrating their commitment to transparency and accountability. It offers the ability to respond to evolving governance expectations and market dynamics.
In just 3 years we have seen a 13% increase in the number of companies including clawback in remuneration packages.
Fig 2. Prevalence of clawback clauses in executive remuneration packages
Source: Market insights based on analysis of TrP150, representative of large, medium and small ASX companies across all sectors
We can observe the breakdown by sector as well. While sectors such as Financials (71%) and Healthcare (62%) exhibit higher adoption rates, clawback is not as prevalent for others, such as Utilities. Understanding sector-specific nuances can be important for companies tailoring their governance frameworks to address industry-specific challenges and expectations.
Fig 3. Prevalence of clawback clauses across sectors
Source: Market insights based on analysis of TrP150, representative of large, medium and small ASX companies across all sectors
A recent instance of clawback being exercised
Reviewing recent instances of clawbacks can provide valuable insights for companies facing similar situations. For example, Rio Tinto applied clawbacks to its top executive’s pay, reducing former CEO Jean-Sébastien Jacques’ bonus by around £2.7 million and cutting his total remuneration by about £1 million following the destruction of the Juukan Gorge sacred sites in Western Australia in 2020. Such cases offer important insights for companies refining their clawback policies.
How to prepare for the possible regulatory changes around clawbacks
- Review relevant documentation for alignment. Consider leadership contracts to understand if there are already clawback mechanisms in place. Are the terms consistent with clawback references in incentive policies, share plan rules, remuneration report disclosures?
- Identify the relevant trigger events likely applicable for your sector. For example “material failure impacting safety” may be a more relevant and specific trigger for clawback than a broad clause “gross misconduct”.
- Agree a process should clawback be enacted. Who will be responsible for gathering relevant information and undertaking the investigation? What decision making approach will be applied by the Remuneration Committee and/or Board? What are the communication protocols with the individual(s) and stakeholders? Is a continuous improvement mechanism in place to monitor the outcome in line with market practice and stakeholder expectations?
Contact us now
If you’re looking to understand more about clawback, contact The Reward Practice. We specialise in designing tailored governance frameworks and remuneration strategies to meet the unique needs of clients across industries.
Find out how we can help elevate your organisation’s governance practices to drive sustainable success in today’s rapidly evolving business environment.
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