Clawback or claw back is any money or benefits that have been given out, but are required to be returned (clawed back) due to special circumstances or events, such as the money having been received as the result of a financial crime, or where there is a clawback provision in the executive compensation contract.[1][2]
In law, clawback is most commonly known as restitution.
From government grantees
In the past, clawback phenomena have been used primarily in securing tax incentives, abatements, tax refunds, and grants. Clawbacks are distinguished from repayments or refunds as they involve a penalty, in addition to a repayment.
The use of tax incentives for attracting jobs and capital investment has grown over the past decades to include performance measures from which to gauge a company's growth. Typical measures are:
More unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit, or the requirement to bring a given technology to a commercial market. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, it is sometimes alleged that the triggering of clawbacks for non-performance will likely become more ubiquitous.
Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of corporate welfare. They are highly controversial and are utilized as community-based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.[3][4]
From employees
Clawback provision
A clawback provision is a contractual clause typically included in employment contracts by financial firms, by which money already paid to an employee must be paid back to the employer under certain conditions.
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 right to revoke, reclaim, or otherwise repossess some or all of the bonus amount(s).[6] 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.[7] The growing popularity of clawback provisions is likely, at least in part, due to the
From investors
Clawback lawsuits in US courts, especially from innocent individuals and entities who profited from financial crimes of others, have increased in the years since 2000.[16]
The yearslong clawback undertaken after the Madoff investment scandal, which attempted to transfer money back from the financial winners to the financial losers among those who had invested in Bernie Madoff's Ponzi scheme, is notable both for the size and success of the operation. A team of lawyers headed by Irving Picard were able to recover over $13 billion, or about 75%, of the estimated $19 billion collectively lost by investors, and transfer it back to those investors who had claimed losses.[16][17][18] This was a far higher percentage than the usual recovery rate for investor clawbacks, which typically ranges from 5 to 30 percent.[18]
Other clawback types
Clawback provisions are also used in bankruptcy matters where insiders may have raided assets prior to a filing,.[20] 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 such as the 2008 financial crisis.
In various countries
Italy and the Netherlands have several clawback regimes, and there are two clawback regimes in the United Kingdom.[21] The French clawback regime is limited.[21] In Belgium, their enforceability is unclear.[21]