What is a clawback?

What is a clawback? A quick corporate leadership education guide to explain crucial remuneration policy and what you need to know. 

Compensation is a tricky thing to get absolutely right, especially as you go to more senior levels within a business. 

In many cases, clawbacks are tactics used by superiors to recoup remuneration that they feel should never have been paid. When they’re used, things can get unpleasant. If you’re unfamiliar with the term, what you’ll realise very quickly is that if you’re ever considering using clawbacks, you should have a policy in place governing when and how they occur.

A clawback is a sum of money or other kind of benefit that was previously given to an individual, but subsequently recalled or “clawed back”. Usually, clawbacks are paid alongside a penalty, showcasing how they are often used as a punitive measure. 

Their primary use occurs in cases where the recipient has performed poorly in their role or was found to have committed some kind of misconduct. 

While clawbacks could technically apply to any employee of a business, they are often discussed in the context of CEO and other executive pay, as this kind of high-stakes role can frequently see blunders of massive proportions where clawbacks may be highly relevant.

Clawbacks – or more specifically, the possibility of a clawback – are more systematic than you might think. They’re often built into executive contracts and are widely accepted in certain fields. 

The reason is that they act as a kind of insurance policy for senior roles, which often include incentive-based conditions and room for significant bonuses. Other stakeholders want assurances that any of these bonuses can be recouped, with interest, if a corporate leader is found to have done wrong. 

Since the late 2000s, the Great Recession has prompted a new wave of interest in clawbacks as a means to guard against the same kind of financial recklessness from happening again.

For boards and executives, navigating the nuances of Clawbacks requires careful attention. Here are a few key considerations:

• Having a policy for clawbacks is essential. It’s no use to try and apply a clawback-like penalty on someone without rules being in place beforehand. Doing so will likely lead to a legal battle. Good clawback policies should be clear, concise, and unambiguous regarding trigger events, the scope of individuals covered, and the types of compensation subject to recovery. 
• They’re often expected as part of contracts. In specific industries like banking, clawbacks – or the potential for one – can be a standard part of contract negotiation.  
• You need to be consistent. Many companies will apply multiple clawbacks over a ten-year period. Those responsible for implementing them must show concise objectivity around their use, trigger events and other key factors. 
• You must understand the legal situation in your own country. Every government will have different rules around clawbacks. Some countries severely limit the scenarios when clawbacks are legally allowed. For those with more restrictions, exceptions are often made in industries like finance, where companies are freer to use clawbacks. Again, this is often a knock-on effect of the Great Recession.

• A clawback is money or other benefits reclaimed by a company from an individual in response to poor performance or misconduct. 
• Clawbacks are a central part of executive contracts, acting as a kind of insurance policy against bad management. 
• Having a policy for where, when and how clawbacks can be used is vital