Canadian HR Reporter

CANADIAN HR REPORTER APRIL 2019 FEATURES 25 COMPENSATION Clawbacks growing in popularity Risk mitigation tool also sees stronger policies among S&P/TSX 60 companies By Ming Young C lawbacks are an integral risk mitigation tool, pro- viding many Canadian companies with the ability to recoup or cancel undeserved in- centive payments or grants that were made under a different un- derstanding of company perfor- mance or individual behaviours. e prevalence of clawbacks among the S&P/TSX 60 compa- nies has increased considerably in the past five years. In 2013, 59 per cent of the companies said they had claw- backs, compared to 95 per cent in 2018, according to S&P/TSX 60 proxy circulars. Also in 2013, a number of com- panies that didn't have clawbacks indicated in their proxies that they were still monitoring regulatory developments and market prac- tices, as the U.S. Securities and Exchange Commission (SEC) had yet to finalize Dodd-Frank claw- back requirements. Fast-forward to 2018, and many have initiated clawbacks despite the lack of SEC guidance. No doubt, the influence of institu- tional investors and proxy advis- ers — strong advocates of publicly traded companies implementing clawback policies to discourage excessive risk-taking — played a role. For example, Institutional Shareholder Services (ISS) consid- ers whether a company has such as policy among its primary evalua- tion factors for executive pay. Double triggers The most prevalent clawback provision in both 2013 and 2018 was the "double trigger" which requires a material financial re- statement caused — at least in part — by misconduct. Its use has grown by 20 percentage points in that five-year period. Prevalence of clawback triggers "Single trigger" policies requiring only material restatement or mis- conduct have also become much more common, doubling in prev- alence in the past five years. In particular, clawback poli- cies tied to employee misconduct have become almost as common today (41 per cent) as double- trigger polices were five years ago (47 per cent). Misconduct triggers cover a wide range of activities detrimen- tal to a company. ese include gross negligence, intentional mis- conduct, fraud, theft or violation of the employee code of conduct, along with actions that cause ma- terial financial, operational or rep- utational harm to the company. Seven S&P/TSX 60 companies (12 per cent of the total) have made changes to the triggers since 2013. Two switched from a double-trig- ger policy requiring both miscon- duct and a material restatement to a single-trigger policy involv- ing either misconduct or material restatement. e other companies added a single trigger to their ex- isting clawback policies. These changes provide the company or board with more le- vers to initiate a clawback where warranted. Among other policy changes observed, two companies broad- ened the compensation covered by the clawback from just the an- nual incentive plan to both annual and long-term incentives. One of those two companies also wid- ened the coverage of the policy to include all senior executives rath- er than just the CEO and CFO. Evolution in thinking e introduction of changes to Canadian clawback policies re- flects an evolution in thinking that considers internal policies, peer practices and investor feedback. For example, Glass Lewis recently updated its policy to state it not only considers whether a claw- back policy is in place but looks at the specific provisions. e changes are also a reac- tion to a number of prominent situations where companies have suffered reputational harm due to bad executive behaviour, and boards want the flexibility to ad- dress these circumstances. The changes in the policies reflect an attempt to strengthen the clawback provisions, which should increase their ability to deter improper behaviour. The stronger clawback poli- cies share many of the following characteristics: • ere is a wider array of compen- sation that is subject to potential recoupment such as stock gains and deferred compensation. • ey apply to a broader group of executives than just the CEO and CFO. • ere is more mandatory en- forcement of the clawback, which in turn diminishes the board's use of discretion in ap- plying a clawback. e increased likelihood of a clawback will in- crease the deterrent effect. at said, many boards prefer to re- tain discretion on the imposition and extent of clawbacks to ad- dress the specific circumstances of any particular situation while balancing the need to provide a degree of certainty or clarity to executives where a clawback might be enacted • ere are clearly defined look- back periods for a company to recoup compensation that has been paid or vested (for example, two to three years). Many poli- cies do not specify the look-back period as it is left to the board's judgment, which may lead to a shorter look-back period. • ere is a broader range of events that can trigger a clawback. As part of this trend, we are seeing the shift from double trigger to single trigger clawback policies. Additional triggering events may be specified such as breach of post-employment agree- ments. On the flip side, there are fewer limitations on the trigger- ing on the clawback, such as re- quiring intentional misconduct or materiality, which would also broaden the triggering events. How are companies proceeding? While many companies initially introduced a clawback policy to satisfy regulations or investor feedback, more companies are now considering the details of their policies and considering ways to enhance their effective- ness as a risk management tool. is will entail reviewing current policies against peer best practic- es, weighing the pros and cons of potential changes to strengthen the policy, while ensuring it treats executives fairly. Ming Young is an executive compensa- tion consultant based in Willis Towers Watson's Toronto office. Email ming. young@willistowerswatson.com or executive.pay.matters@willistowers watson.com. Canadian Safety Reporter is an essential resource for the creation of a safe workplace. This monthly newsletter illustrates techniques and strategies on how to keep the workplace safe from hazards and in full compliance with the latest legislation. WORKPLACE SAFETY IS A CHEAP YET EFFECTIVE INSURANCE POLICY To order your subscription call 1.800.387.5164 | 416.609.3800 www.safety-reporter.com/subscribe Subscribe today for only $139 Order No. 20208-19 2018 2013 Misconduct leading to material reinstatement 67% 47% Material reinstatement alone 31% 16% Misconduct alone 41% 19% Credit: Andriy Blokhin/Shutterstock Pedestrians walk past the United States Securities and Exchange Commission in Washington, D.C.

• Cover