How does clawback work

But any such temptation is likely to be offset by concerns that executives who develop a reputation for early departures from firms will soon find they have fewer high-quality career opportunities.

It is critical to good governance that companies be able to recover compensation from senior executives that has not been fairly and fully earned.

What we propose here will enable the clawback provision to live up to its potential. You have 1 free article s left this month. You are reading your last free article for this month.

Subscribe for unlimited access. Create an account to read 2 more. Executive compensation. And how to fix them. Read more on Executive compensation. Charles Elson is the Edgar S. The first federal statute to allow for clawbacks of executive pay was the Sarbanes-Oxley Act of It provides for clawbacks of bonuses and other incentive-based compensation paid to CEOs and CFOs in the event that misconduct on the part of the company—not necessarily the executives themselves—leads it to restate financial performance.

The Emergency Economic Stabilization Act of , which was amended the following year, allows for clawbacks of bonuses and incentive-based compensation paid to an executive or the next 20 highest-paid employees. It applies in cases where financial results are found to have been inaccurate, regardless of whether there was any misconduct.

In July , a proposed Securities and Exchange Commission SEC rule associated with the Dodd-Frank Act of would allow companies to claw back incentive-based compensation paid to executives in the event of an accounting restatement. The clawback is limited to the excess of what would have been paid under the restated results. The rule would require stock exchanges to prohibit companies that do not have such clawback provisions written into their contracts from listing.

This rule has yet to be approved. The term clawback can also be found in some other settings. In private equity , it refers to the limited partners' right to reclaim part of the general partners' carried interest, in cases where subsequent losses mean the general partners received excess compensation. Clawbacks are calculated when a fund is liquidated. Medicaid can claw back the costs of care from deceased patients' estates.

In some cases, clawbacks may not even refer to money—lawyers can claw back privileged documents accidentally turned over during electronic discovery. Several proposed and enacted federal laws allow clawbacks of executive compensation based on fraud or accounting errors. Companies may also write clawback provisions into employee contracts, whether such provisions are required by law or not, so that they can take back bonuses that have already been paid out.

However, there are many examples of clawbacks used by corporations, insurance companies, and the federal government. Below are some of the most common clawback provisions put into place today:.

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