Boards and executives managing clawback risk are really managing two different instruments. The first is a mandatory, no-fault recovery policy required by SEC Rule 10D-1, triggered by financial restatements and fixed in its terms by regulation. The second is a voluntary, discretionary supplemental policy that companies design themselves to reach misconduct, fraud, reputational harm, and other risks the SEC rule does not touch. Compensation advisory firm Pearl Meyer's guidance is blunt on the point: the Dodd-Frank policy should be kept as "pure boilerplate," and best practice among large companies is to maintain a separate, distinct supplemental policy rather than stretching the mandated one.
The Dual Landscape of Executive Clawback Policies
The two policy types serve different purposes and rest on different legal foundations. The mandatory policy exists because the SEC, acting on a Dodd-Frank mandate, adopted Rule 10D-1 in October 2022, with the final rule effective January 27, 2023. It compels recovery of erroneously awarded compensation after a restatement, regardless of fault. The supplemental policy, by contrast, is a governance choice: companies adopt it voluntarily to cover conduct the rule does not reach. A DragonGC report on S&P 500 clawback disclosures, discussed by G. Michael Weiksner, James Palmiter, and Neil McCarthy on the Harvard Law School Forum on Corporate Governance in July 2024, analyzed 401 companies that filed independent clawback policy disclosures in the twelve months ended May 7, 2024, and found a majority going beyond the SEC's minimum requirements.
Mandatory Clawbacks: SEC Rule 10D-1 Requirements
The mandatory policy's trigger is mechanical: a restatement of earnings that results in overcompensation of executive officers. Under the SEC's final rule, recovery applies to any executive officer, regardless of whether that officer played any part in preparing the financial statements—a deliberate departure from the older Sarbanes-Oxley Section 304 regime, which required misconduct and applied only to CEOs and CFOs, with enforcement power resting solely with the SEC.
The rule's look-back provision reaches any executive officers who served the firm in the past three years, and firms must consider all compensation affected by a restatement in that window. Both "Big R" restatements—errors material to previously issued financial statements—and "little r" restatements must be evaluated for erroneously awarded compensation. Covered compensation is incentive-based pay "granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure," including both cash and stock incentive compensation. Fault is irrelevant: recovery is required even from executives with no involvement in the error.
Discretionary Clawbacks: Tailoring Policies for Broader Risks
Supplemental policies exist because the mandatory rule's scope is narrow by design. It reaches only restatement-driven, incentive-based pay of executive officers. It does nothing about misconduct that damages the company without producing a restatement—ethical breaches, policy violations, or reputational harm. Discretionary policies fill that gap, and their design is entirely a matter of corporate choice. Pearl Meyer frames the design questions every board must answer: what the clawback triggers will be, who will be covered, what types of compensation will be covered, what the look-back period should be, and who will decide how to enforce the policy.
Market practice shows these policies are widespread. The DragonGC study found that a majority of the S&P 500 companies it analyzed were not only meeting but exceeding the SEC's requirements, and that most policies align with recommendations from proxy advisors and major investors such as ISS, Glass Lewis, and BlackRock, which stress broad executive accountability for misconduct affecting financial and reputational integrity.
Key Design Choices for Discretionary Policies
Observed practice points to consistent trigger categories. Research reviewing voluntarily adopted clawback policies found the three most common triggers were misconduct, restatements, and fraud, with many firms maintaining multiple possible triggers. The Harvard Forum discussion of the DragonGC findings highlights triggers tied to misconduct affecting financial and reputational integrity, and companies vary in how specifically they define those triggers—some enumerate conduct precisely, others leave definitions broad to preserve flexibility.
Boards should note a governance tension the research identifies: discretion cuts both ways. One study cited found that 76% of firms allowed discretion when enforcing clawback of excess pay, and the same research observed that the personal relationships between directors and executives can weigh against enforcement. A well-drafted supplemental policy should therefore specify who decides and on what standard, before a triggering event forces the question.
Comparative Framework: Mandatory vs. Discretionary Clawbacks
The table below contrasts the two policy types across the dimensions boards most often confuse. The mandatory column reflects what the SEC rule fixes; the discretionary column reflects design choices companies control.
| Feature | Mandatory (SEC Rule 10D-1) | Discretionary (Supplemental) |
|---|---|---|
| Policy type | Required by SEC Rule 10D-1 under the Dodd-Frank Act; rule adopted October 2022, effective January 27, 2023 | Voluntarily adopted by the company; many S&P 500 companies maintain one alongside the mandatory policy |
| Primary trigger | Financial restatement due to material noncompliance with financial reporting requirements ("Big R" and "little r" restatements) | Company-defined; commonly misconduct, fraud, reputational harm, or violations of company policy |
| Executive fault required? | No — recovery is required regardless of fault | Typically yes — misconduct or fault is usually a condition, but the company defines the standard |
| Covered executives | Current and former executive officers who served within the look-back period, regardless of role in preparing financial statements | Company-defined; can extend beyond executive officers |
| Covered compensation | Incentive-based compensation tied wholly or in part to financial reporting measures, in cash or stock | Company-defined; can include salary, severance, and other pay beyond incentive compensation |
| Look-back period | Fixed three-year period preceding the restatement | Company-defined; set by the board when designing the policy |
Read left to right, the table shows the core distinction: the mandatory policy is uniform and non-negotiable, while every discretionary element is a board decision.
Best Practices for Policy Coordination and Compliance
Pearl Meyer's advice is to resist the temptation to expand the Dodd-Frank policy into something broader. Tweaking the mandatory policy risks noncompliance with the Clawback Rule; keeping it as pure boilerplate preserves the clean, mechanical recovery the SEC expects. The supplemental policy is where boards should do their tailoring, answering the five design questions—triggers, covered personnel, compensation types, look-back period, and enforcement authority—against the company's specific risk profile. The DragonGC findings suggest aligning those choices with the expectations of ISS, Glass Lewis, and BlackRock, whose guidelines emphasize enforceability and transparency.
This article is not legal advice, and the discretionary triggers described here reflect observed trends, not an exhaustive catalog of possible structures; the discussion applies to U.S. listed companies subject to SEC rules.
Navigating Clawback Policies: A Strategic Imperative for Boards
Boards and C-suite executives should implement and maintain two distinct clawback policies: a boilerplate SEC Rule 10D-1 compliant policy for financial restatements and a tailored supplemental policy to address broader risks like misconduct or reputational harm. The measurable indicator is a review of corporate governance documents showing separate, clearly defined mandatory and discretionary clawback policies, with the discretionary policy's triggers, scope, and terms aligned with the company's specific risk profile. Boards that conflate the two instruments risk both compliance gaps in the mandatory policy and unenforceable ambiguity in the discretionary one.
Sources
- Designing and Implementing Executive Compensation Clawbacks — Pearlmeyer
- Compensation Clawbacks Report — The Harvard Law School Forum on Corporate Governance
- US SEC releases new rule on executive compensation clawbacks — Nortonrosefulbright
