Clawback

A clawback or clawback provision is a special contractual clause typically included in employment contracts by financial firms, by which money already paid must be paid back under certain conditions. The term also is in use in bankruptcy matters where insiders may have raided assets prior to a filing, and in Medicaid, when a state recovers costs of long-term care or covered medical expenses from the estates of deceased Medicaid patients. The aim of the clause is to secure an option for an employer or trustee to limit bonuses, compensation or other remuneration in case of catastrophic shifts in business, bankruptcy, and national crisis as the financial crisis of 2007–2010, and for states to recoup the cost of administering Medicaid services.

The term clawbacks or claw backs can also be used to refer to any money or benefits that have been given out but need to be returned due to special circumstances or events, which are mentioned in a contract.

The employees' bonuses are, in a clawback scheme, tied specifically to the performance (or lack thereof) of the financial product(s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the bonuses paid to the individual are allowed to be retained by the individual. However, if the product fails, and damages the nature of the firm—even years down the line from the product's inception—then the firm has the inherent right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s). However, research shows managers who are subject to clawback provisions that are newly in place in a company often try to offset their increased risk of bonus clawback by demanding an increase in base salary that is not subject to being clawed back.

The prevalence of clawback provisions among Fortune 100 companies increased from lower than 3% prior to 2005 to 82% in 2010. The growing popularity of clawback provisions is likely, at least in part, due to the Sarbanes-Oxley Act of 2002, which requires the U.S. Securities and Exchange Commission (SEC) to pursue the repayment of incentive compensation from senior executives that are involved in a fraud. In practice, the Securities and Exchange commission has enforced its clawback powers in only a small number of cases.

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