Your Company Triggered an SEC Clawback. Now What?
Workspan Daily
September 09, 2025

Clawing back an executive’s pay can be an emotionally fraught process, but organizations have tools at their disposal to help ease the burden on total rewards teams, the compensation committee and affected executives. While adherence to the U.S. Securities and Exchange Commission’s (SEC) 2023 clawback rule is mandatory, companies’ hands are not completely tied. Successful implementation of clawbacks requires several strategic decisions around timing, methods and broader policy application that go beyond mere compliance and can make a significant difference to employees and shareholders.

What Triggers a Clawback?

Approximately 400 U.S. public companies file a restatement each year, but not all restatements require clawbacks. The SEC’s listing standards around clawbacks require public companies to recover erroneously delivered incentive-based compensation from executive officers — regardless of fault — only if the restatement affects incentive plan metrics. Broadly, the overarching rule states companies must:

  • Recover affected incentive compensation paid during the three fiscal years preceding the restatement — the “lookback period” (only for fiscal years after the rule came into effect).
  • Claw back performance-based compensation tied to the relevant metrics (bonuses, performance stock units, etc.) — other forms of compensation, such as base salary or time-based equity, are not subject to the SEC’s rule.
  • Pursue recoupment in a “reasonably” prompt manner.

This mandatory clawback can be triggered when a company files either a “Big R” (formal amended SEC filing) or “little r” (out-of-period adjustment) restatement, so long as the restatement affects the financial metrics underlying incentive awards. For example, if a company amends its earnings before interest, taxes, depreciation and amortization (EBITDA) for the year, and 20% of the annual incentive plan is tied to EBITDA metrics, the company will be required to recalculate incentive payouts and recover any overpayment that resulted from the erroneous EBITDA performance during the lookback period.

Five Strategic Questions Beyond Compliance

The following list provides questions to consider if your organization triggers a clawback.

1. Should You Expand Clawbacks Beyond the Mandated Executives?

Though the SEC rule covers only Section 16 executive officers, we recommend that most companies have a discretionary policy that grants them the ability, but not the obligation, to claw back pay from both Section 16 and non-Section 16 employees, recoup compensation not directly tied to financial restatements, or trigger clawbacks based on broader misconduct, such as causing reputational harm.

Non-mandatory clawbacks make the most sense when an employee’s conduct directly impacted the need for a restatement. In cases where the restatement resulted from failures within the accounting or finance functions, for example, the committee may consider discretionary clawback actions against responsible accounting/finance leaders — even if such individuals fall outside the SEC’s scope.

That said, broader clawbacks can send strongly negative public signals and may significantly damage internal morale. In most cases, shareholders do not expect clawbacks from non-mandated employees, but the decision involves balancing culture, accountability and the specific circumstances of the restatement.

2. How Quickly Should You Act?

In general, the quicker that companies move, the easier the process will be. The SEC requires reasonably prompt recovery, allowing organizations some recoupment flexibility. While some affected executives may prefer to delay repaying the money, providing too much runway for recoupment could lead to additional, more detailed disclosures on behalf of the organization.

Initial clawback disclosures in proxy statements must only include the aggregate amount of compensation subject to recovery. However, if amounts are not recovered within 180 days of the restatement determination, companies are required to disclose details on an individual level, including specific recovery efforts and outstanding amounts, in subsequent disclosures.

Companies should consider requiring repayment before the following fiscal year-end, or within a 180-day window, to avoid additional disclosure obligations.

3. How Do You Recoup the Payments?

There are two primary options for recouping payment, and their usage largely depends on the executive’s current employment situation:

  • Direct repayment. The executive writes a check for the recouped amount. This is often the only option for employees who no longer work at the company.
  • Offset from future pay. This could be a one-time reduction in base salary, loss of future bonuses or lower equity vesting, and can take place over an extended time horizon. This is frequently the best option for current employees.

Though employment status generally dictates the method used, companies should consider administrative complexity, cash flow impact on executives, executive preference and practical feasibility before making decisions.

4. Who Handles the Tax Burden?

One frequently underestimated issue is the tax treatment of repaid compensation. Many affected employees will have already paid taxes on the compensation they are now required to return. Executives cannot simply amend prior tax returns for clawed-back compensation. Instead, they must file complex “claim of right” forms under Section 1341 of the U.S. tax code.

While the tax burden rests with employees, companies should consider providing clear documentation and offering access to independent tax advisors to ease the sting. Offering such an olive branch may reinforce a sense of fairness during an already difficult process.

5. How Might Clawbacks Affect Annual Pay Decisions?

Regular compensation decisions (e.g., raises, bonuses, new equity) don’t stop during clawbacks, but they may face heightened scrutiny if perceived as offsetting recovered pay.

Accordingly, committees should be especially deliberate in evaluating any pay decisions in a clawback year. Careful documentation of rationale and alignment with broader talent and business strategy likely will be critical to avoid the appearance that new awards are intended to offset recovered compensation.

The Path Forward

The SEC’s clawback rule transforms what was once discretionary into mandatory action. The companies that handle clawbacks most effectively will generally be those that plan ahead, act thoughtfully and communicate transparently — balancing regulatory compliance with practical realities and employee relations.

Organizations can think beyond the SEC’s technical requirements to consider the wider implications, in terms of:

  • How does this action align with corporate culture?
  • What message does it send to stakeholders?
  • How can the company maintain talent while meeting fiduciary duties?

Successful execution likely requires close coordination among management, the compensation committee, legal counsel and external advisors to ensure a balanced approach that meets compliance requirements while also managing risks, optics and internal dynamics.

Clawbacks can be a sensitive topic for employees — particularly when incentive plans have already underperformed, the organization is navigating external headwinds, or it is operating in a disfavored sector. With proper preparation and strategic thinking, however, clawbacks can be executed in ways that meet compliance requirements while preserving organizational relationships and shareholder confidence.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

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