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The SOX 'Clawback' Provision
Big bonus payouts at troubled financial institutions in the midst of the recent financial crisis have pushed executive compensation issues into the public spotlight. The stimulus bills passed in late 2008 and early 2009 each contained a package of executive compensation restrictions for institutions taking government TARP funds. The SEC, motivated by the belief that pay practices contributed to the crisis, has proposed rules requiring all public companies to disclose how their compensation arrangements align with their risk management objectives. A plethora of bills currently pending in Congress ' following up on policy initiatives advanced by the Obama administration in June ' would impose new independence requirements on compensation committees and their advisors, and require all public companies to offer their shareholders a non-binding vote on their executive compensation programs.
Section 304
In the wake of this renewed interest in executive compensation issues, a recent SEC enforcement action involving Section 304 of the Sarbanes Oxley Act ' also known as the compensation “clawback” provision ' has generated a flurry of attention. Briefly, Section 304 requires the CEO and CFO of a publicly traded company to repay the company for any incentive compensation they've received and any proceeds from any company stock they've sold during a period in which the company is required to restate its financials due to “misconduct.” In SEC v. Jenkins, an enforcement action currently pending in federal district court in Arizona (complaint available at http://sec.gov/litigation/complaints/2009/comp21149.pdf), the SEC is claiming that the former CEO of CSK Auto Corporation, Maynard Jenkins, is required to reimburse the company for over $4 million in incentive compensation and stock sale proceeds which he received from 2002 to 2004, years for which the company's financials were later required to be restated (twice).
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