Authored by Frances McKenna, a MarketWatch reporter based in Washington.
New rules that are designed to discourage executives from manipulating financial results to boost their bonuses may have a side effect — encouraging them to ask for more pay.
That's because of the rare, but not unheard of, situation where a company restates its earnings higher.
Read: Rarely enforced SEC rules may give green light to earnings manipulation
The new rules, designed to increase the reach of so-called "clawback" provisions, no longer require financial misconduct as a trigger for a potential clawback action; and would cover executives beyond only the chief executive and chief financial officers.
That would greatly widen the pool of individuals to which the rules apply. As a result, some say, more executives with relatively little connection to the financial reporting process might seek opportunities to protect themselves.
Read: SEC's clawback proposal leaves a big loophole
"If an employee is entitled to a particular bonus or equity if the company achieved a particular goal and then he doesn't receive the payment because the company incorrectly believed the goal wasn't achieved, it is possible that this may result in a contract claim by the employee," said Regina Olshan, global head of law firm Skadden Arps' executive compensation and benefits practice.
The Securities and Exchange Commission, which oversees enforcement of the rules, is chiefly concerned with making sure excess incentive compensation is recouped when paid as a result of inflated financial performance. Experts say it is unlikely to get involved when restatements underrepresent a company's results and executives are underpaid.
People knowledgeable about SEC enforcement, meanwhile, say very few executives have inquired about the possibility of using the current rules to bump up their compensation in such cases.
But positive accounting restatements, though uncommon, do happen—and their effect can be huge. According to research firm Audit Analytics, from 2010 to 2015 there were 140 instances of restatements to correct material accounting errors that resulted in a positive impact on financial metrics commonly used to determine bonuses.
The top 30 cases swung net income to the good for between $9 million and $175 million—certainly enough to potentially impact the calculation of a CEO's or CFO's incentive compensation.
MarketWatch contacted the 36 companies with the largest positive impact during the period to ask whether its executives asked for a retroactive bump in their incentive compensation—and if they paid one.
Twenty-one companies didn't respond. Five declined to comment. Three are no longer listed on a major exchange and one is now bankrupt. One company, CIT Group
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