What is a Clawback?

Clawback describes when an employer recovers already disbursed money from an employee, likely with an additional penalty. There are federal laws enacted and proposed which provide for clawbacks associated with executive compensation coming from accounting errors or fraud. 

Employee contracts provided by companies may include clawback provisions, regardless if laws are requiring there to be such provisions, which allow employers to take back any bonuses they have previously paid out.

How Does Clawback Work? 

Clawbacks are specific clauses in contracts regarding money that's offered for services that are given back contingent on circumstances outlined in the agreement. The provisions are made so as to prevent the use of incorrect information by an individual. For example, in the financial industry a clawback is to avert the misapplication of accounting details. 

Clawbacks put a balance between community or economic progress and corporate advantage. Before 2005, clawback provisions were less than three percent for Fortune 500 companies. They rose nearly 82 percent by 2010. 

Clawback is a term found in other settings as well. When it is used in private equity, it alludes to the right of limited partners to recover a portion of the general partners carried interest, which is a reserved incentive for the management of the firm or an investing venture capitalist, in situations when the resultant losses mean the general partners get paid excess compensation. 

A clawback is determined at the time a fund is liquidated. Medicaid can clawback, from deceased patients estates, costs of care. 

A case when clawbacks don't involve money would be when an attorney clawbacks confidential documents unintentionally turned over during electronic discovery. 

The Sarbanes-Oxley Act of 2002 was the first federal statute to approve clawbacks of executive pay. In the event of company misconduct, not necessarily committed by executives, that leads to the restatement of the firm's financial performance, the statute provides for clawbacks of incentive-based compensation, such as bonuses, paid to CFOs and CEOs. 

In 2008, the Emergency Economic Stabilization Act, which was amended the following year, allowed for incentive-based compensation paid to an executive or the next 20 employees paid the highest. The laws are only applicable to organizations that get TARP (Troubled Asset Relief Program) funds. Regardless of misconduct, this law applies when financial outcomes are found to be inaccurate. 

In 2015, an SEC (Securities and Exchange Commission) rule was proposed associated with 2010's Dodd-Frank Act that would let companies clawback incentive-based pay to executives in cases of an accounting restatement. The limitations of the clawback are only the excess of what would have been paid based on the restated results. The rule would mean stock exchanges had to prohibit companies from being listed if they did not have such clawback provisions detailed in their contracts. 

Clawbacks can be found in the areas of government contracts, dividends under specific circumstances, and life insurance.