Publicly traded company corporate executive: you may have to reimburse all or part of the bonus that you received if there are mistakes in your company’s accounting
If you’re a current or a former executive of a publicly traded company in the United States of America, your company may have to recover from you the incentive-based compensation that you received. This could be the case if there were errors and mistakes in your company’s accounting that must be corrected and resubmitted.
The Securities and Exchange Commission (SEC) oversees the procedure and determines its scope.
SEC Rules
Overview
Your company’s financial statements must be prepared properly and accurately. The SEC reviews the ones that publicly traded companies prepare to ensure that they meet those requirements. If they need to be corrected, you may be required to reimburse the bonus that you received.
You’re required to reimburse the bonus that was awarded to you during the three years preceding the date such a restatement was required.
The amount that you need to reimburse is the difference between the bonus amount calculated using the corrected financial statements and the bonus amount that was calculated using the erroneously filed ones.
What are the new requirements?
The SEC requires your company to:
- Adopt a compensation recovery policy,
- Comply with that policy, and
- Disclose the following information as an exhibit to its annual report:
> The date your company was required to prepare an accounting restatement.
> The aggregated dollar amount of erroneously awarded compensation attributable to such accounting restatement.
> The aggregate amount that remains outstanding and any outstanding amounts due from any current or former named executive officer for 180 days or more; and
> Details regarding your company’s challenges, if any, to recover the incentive-based compensation awarded in error.
However, your company will not be required to recover the erroneously awarded bonus under any one of the following situations:
- Your company attempted to recover the bonus from you but wasn’t successful. The expenses that they will incur to have you reimburse the bonus will exceed the amount of the bonus that they will recover.
- Your company’s attempt to recover the bonus amount would violate your company’s home country law that existed at the time of adoption of the SEC’s rule. And your company provides to the organization where it is listed an opinion of counsel that confirms that.
- The reimbursement of the bonus paid to you in error would likely cause an otherwise tax-qualified retirement plan to continue to not be a tax-qualified retirement plan under the requirements of the Internal Revenue Code.
Scope of the SEC new rule
All publicly traded companies fall under the rules including foreign private issuers (FPIs), controlled companies, smaller reporting companies and emerging growth companies.
However, the following entities don’t fall under the disclosures:
- Issuers of security futures products, standardized options,
- Unit investment trust securities, and
- Certain registered investment company securities.
Sanction for noncompliance
Your company may be removed from the financial marketplace exchange if it doesn’t comply with the rules.
Effective date
The new rules take effect 60 days following publication of the SEC’s release in the Federal Register. The stock exchanges have 90 days from the day the rules become effective to propose new listing standards. The latter must be effective no later than one year following their publication in the Federal Register.
Your company will be required to adopt an incentive-compensation recovery policy no later than 60 days following the date the listing standards become effective. It must also begin to comply with these disclosure requirements in proxy and information statements and its annual report filed on or after it adopts its recovery policy.
Case study: you’re the Chief Executive Officer (CEO) of a company whose stocks are traded on the Nasdaq. To encourage you to perform well, the Board has decided to award you a bonus of several millions of U.S. dollars if the company’s revenue increases by 25% over three years.
The company filed its financial statements with the SEC that reflect a 30% increase of the revenue over three years. You received your bonus as a thank you for your work.
However, the SEC later reviews the financial statements and disagrees with how your company accounted for its revenue. They require that the company corrects the error and resubmits its financial statements. The corrected financial statements reflect a 10% increase of the revenue over the same three years.
Under the new rule, your company is required to request that you reimburse the bonus that was calculated based on erroneous financial statements for the three years before the year the restatement was required.
Shareholders want to know the relationship between what executives are paid and the value that they create for them. The required disclosure should add to corporate responsibility. Indeed, the clearer executive pay disclosures required will encourage corporate senior management to look after their company’s financial statements and make sure that they are properly prepared. Their bonus is often tied to their company’s performance. Errors and mistakes in the accounting can have a significant impact on the amount of their bonus, which is often much more than their base salary.