Buried within the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 is the requirement for public companies to develop and implement a mandatory policy to recoup excess incentive-based compensation from current and former executive officers after a material financial restatement.

While compensation recovery policies (or “clawback” policies) are not new, these latest requirements are more stringent and are designed to force companies to tighten up the provisions within their clawback policies and get tough on actual enforcement. As evidence of this “get tough” stance, the Dodd-Frank Reform Act goes so far as to require the national exchanges to delist any company that fails to comply with its own clawback policy.

The new clawback policy requirements

As many know, the concept of clawback policies originally came onto the scene back in 2002 as a result of the Sarbanes-Oxley Act (specifically, Section 304). At the time, the clawback provisions only applied to the chief executive officer and chief financial officer. Furthermore, the provisions were only applicable if the noncompliance resulted from misconduct and was only relevant for compensation events during the year following the misstatement.

Fast forward to July 2010 and we find new and more stringent clawback provisions that require any company listed on a national securities exchange to develop and implement a mandatory recoupment policy stating that following an accounting restatement due to material noncompliance with financial reporting requirements under securities laws, the company will recover certain incentive-based compensation (including stock options) from current or former executive officers for amounts received during the three-year period preceding the date on which the company is required to prepare the accounting restatement. The amount of compensation to be recovered is calculated as the excess amount paid on the basis of the restated results.

In contrast to Section 304 of the Sarbanes-Oxley Act of 2002, the new clawback provisions are broader and cover more individuals. They now apply to all current and former “executive officers” which includes not only the CEO and CFO but also a company’s president, any vice president in charge of a principal business unit, division or function and any other officer who performs a policy making function or person who performs similar policy making functions for the company. In addition, the new requirement to recoup compensation is not dependent on the restatement being a result of executive misconduct. Furthermore, the look back period has been extended from one year to three years and companies must now disclose their clawback policy.

While further clarification is needed, companies would be wise to get ahead of the curve

Some aspects of the Dodd-Frank Act clawback provision are ambiguous and it is clear that further guidance will be required. For starters, the Reform Act does not specify an effective date for implementing the clawback provisions nor does it clearly define what constitutes “material noncompliance” or “incentive-based compensation.”

Until the SEC issues more detailed rules (perhaps in time for 2011 proxy statements?), it will be difficult to ensure complete compliance, however, from a corporate governance perspective, it is recommended that companies not wait — review current policies and consult with an attorney to determine whether or not your policy aligns with the new legislation and subsequent guidance.

Interesting to note with all the attention that has been focused on the healthcare reform law, a minor change with a major impact is dodging the spotlight. As this article from CNN notes, an enormous bureaucratic burden is looming.

The change revolves around expanding the use of 1099s from pertaining to contract labor to now including any individual or corporation from which companies purchase goods and services. Whereas in the past, companies that paid contractors more than $600 over the year needed to issue a 1099, the new law calls for companies that purchase anything over $600, from anyone – an individual or a corporation – to do the same. A small company that buys $2,000 worth of office supplies from Staples? 1099. A moving company that buys $750 worth of accessories from Autozone? 1099.

Amazing that a few small word changes will results in millions of additional forms being sent. The Administration stands by the change, saying that when it goes into effect in 2012 it will cut down on fraud while aiding in data collection. As for its placement in the healthcare reform bill, CNN makes a nice point:

Why did these tax code revisions get included in a health-care reform bill? Welcome to Washington. The idea seems to be that using 1099 forms to capture unreported income will generate more government revenue and help offset the cost of the health bill.

A Democratic aide for the Senate Finance Committee, which authored the changes, defended the move.

“Information reporting improves tax compliance without raising taxes on small businesses,” the aide said. “Health care reform includes more than $35 billion in tax cuts for small businesses…indicating that during these tough economic times, Congress is delivering the tax breaks small businesses need to thrive.”

Adapting to the new law will certainly prove onerous – especially for small businesses – and tax preparers will need to help their clients stay ahead of the game.

Through many of my conversations with CFOs, controllers and owners of mid-market and smaller companies, I’ve noticed a running theme that more emphasis should be placed on the tremendous opportunities afforded by the Hiring Incentives to Restore Employment (HIRE) Act (see this March 2010 MFA Perspectives for more detail on the HIRE Act). While most are vaguely aware that the Act was signed into law back in March of this year, there is less understanding of the tangible tax benefits this Act offers for private sector employers – for profit and nonprofit organizations – as well as state colleges and universities.

As companies once again look to expand their workforce, the HIRE Act tax incentives provide a boost of urgency for businesses to hire new workers. The payroll tax exemption puts money into a company’s cash flow immediately, since the tax is simply not collected in the first place. Also worth mentioning is that the threshold to qualify for the full new hire retention tax credit is relatively low – $16,129 in wages will be required to earn the full $1,000 credit ($16,129 x 6.2 percent = $1,000).

Below is an outline of the new hiring and retention incentives, including important qualification criteria and details on how to claim the tax benefits. Execution, or a company’s ability to quickly recruit and hire, will be key to taking maximum advantage of these incentives. Hiring qualifying workers sooner rather than later will draw the most out of the Act, as the tax credits diminish over time and disappear completely by January 1, 2011.

Details of the New Tax Benefits

Payroll Tax Exemption

Gives a qualified employer an exemption from paying the employer share of Social Security employment taxes (6.2 percent of the first $106,800 of wages) for wages paid in 2010. (more…)