Excess-Pay Clawbacks

Abstract:     
We explain why firms should have a policy requiring directors to recover “excess pay” – payouts to executives resulting from an error in compensation metrics (such as inflated earnings). We then analyze the clawback policies voluntarily adopted by S&P 500 firms as of 2010 and find that only a small fraction had such a policy. Our findings suggest that the Dodd-Frank Act, which requires firms to adopt a clawback policy for certain types of excess pay, will improve compensation arrangements at most firms. We also suggest how the types of excess pay not reached by Dodd-Frank should be addressed.

Number of Pages in PDF File: 31

Keywords: Dodd-Frank, Clawback, Executive Compensation, Bonuses, Stock Options, Restricted Stock, Manipulation, Managerial Power, Sarbanes Oxley

JEL Classification: G18, G28, G34, G38, J33, K22, M52

Accepted Paper Series