Many publicly traded companies have provisions in their compensation policies and employment contracts that require bonuses be paid back and recovered by the employer under certain circumstances.
Now, the Securities and Exchange Commission, in accordance with provisions of the Dodd-Frank Act, has published standards that will require such provisions after hearings have been held. The rule will require current and past executives of public companies to repay all or a portion of bonuses over a three-year lookback where a financial statement was materially restated so that the bonuses fit the restated rather than the original results. There is potential for loss of the entire bonus.
The rule applies to executives who received bonuses even where they had no role in the cause or disclosures that required the restatement.
By contrast, there are currently no rules applicable to bonus clawbacks in not-for-profit organizations (NFPs). Few if any NFPs have such provisions in contracts with their executives –if they have contracts – unless an intermediate sanction penalty is levied. However, with more and more supervision, public scrutiny and media focus, directors of NFPs may begin to think about clawbacks as they deal with the issue in their companies in the for-profit sector.
Should such provisions when applied to NFPs be as broad as the proposed Dodd-Frank rule will be in its application to for-profits?
In our thinking, a clawback for an NFP should be limited in a few ways. First, it should apply to those who were directly involved in activity that brought about the need for the restatement. Reaching out further, a clawback might apply to a broader group if the restatement caused material reduction in financial results, especially if the outstanding payments were higher than the gains for the period in question.
As NFPs grow and focus on becoming more business-like in order to thrive and prosper, and the ability to attract executive talent becomes more competitive, incentives and other compensation items (such as supplemental retirement plans) will be in demand.
These arrangements will look like those in the for-profit sector more than ever before. As we continue to see more compensation packages in NFPs resemble those in the for-profit world, it would not be surprising to see corresponding growth in restrictive provisions within those packages.
These could include time requirements, limits on soliciting fund sources or employees for a period of time after termination of employment, and – where enforceable – covenants not to compete. Other restrictions, dealing with scope of employment, expense reimbursement policy, and so forth, will also play a role.
While these changes may be slow in coming, executives and board members in NFPs should be aware of what is happening in the for-profit world and be prepared for the slow encroachment into their arena.
As salaries and benefits in NFPs become more competitive with their for-profit counterparts, it should come as no surprise that along with the good comes the not-so-good. Once again, it is time for turning lemons into lemonade.
For further information contact: Barry N. Koslow, JD at MKA Executive Planners 781-939-6050 or bkoslow@mkaplanners.com.
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