Clawback provisions are on the rise among Fortunate 100 companies by almost 80%, according to recent statistics from the Corporate Finance Institute (CFI). The CFI stated that clawback clauses were lower than 3% before 2005 but rose significantly to 82% by 2010.
What are Clawbacks?
Clawbacks are frequently used by firms within the Financial Sector, particularly international banks. The term refers to a particular clause within employee contracts, whereby incentive-based pay is taken back from an employee by their employer.
They are typically found within executive pay agreements and are enforced by employers when there is a breach of contract made by an executive. This can include scenarios where an executive has moved on to work for a competitor within a certain number of months stated by the contract. It can also be used to punish underperformance, employee misconduct or other fraudulent situations.
In addition to repayment of the bonus, clawbacks involve a penalty. Companies often use clawbacks as a way of restoring trust in the public and government. By punishing an employee at the top of the corporate ladder, it shows that the company is willing to take responsibility for its wrongdoings. Additionally, companies can use clawback clauses to defer a bonus while measuring performance over a period of time, thereby providing employee incentive to increase workplace productivity and improve performance.
Further academic research has highlighted that voluntarily adopting a clawback clause can be useful in reducing intentional and unintentional accounting errors. The study further indicates an increase in investors’ confidence in a company’s financial statement following clawback adoption, as well as increased pay-for-performance sensitivity.
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