What Is a Clawback?

Q: What is a clawback?

A clawback is a legal clause or provision that specifies situations in which money paid to an employee must be returned to an employer. Clawbacks are typically used for incentive-based pay like bonuses. Clawbacks must be in writing, and they are generally non-negotiable.

Q: Why are clawbacks used?

Clawbacks are typically utilized to protect a company against fraud or misconduct. They may also help prevent wrongful behavior, such as misrepresentation of a firm’s performance or revenue. Another purpose of a clawback is to help consumers and investors feel confident about a company.

Q: Could my employee contract have a clawback clause?

It might — especially if you’re a top executive or you deal with your company’s financial matters. Clawback clauses are appearing in more and more employee contracts. Review your employment contract to see if such a clause is in there, and do the same when changing jobs and signing a new contract. Even though these clauses tend to be non-negotiable, it’s smart to know whether you have a clawback clause or not.

Pam O'BrienUpdated March 29, 2023

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You may have seen the term “clawback” in the news recently. There have been reports about “clawing back” certain types of employee compensation.What is a clawback, exactly? And which types of employees does it apply to? Read on to learn how a clawback works and when it might be used.

Understanding Clawbacks

A clawback is a legal clause or provision that spells out certain circumstances under which money paid to an employee must be returned to an employer. Clawbacks are typically used for incentive-based pay, such as bonuses and stock options. A clawback provision might also apply to a signing bonus that comes with a new job. Your standard paycheck that’s directly deposited into your bank account generally can’t be clawed back. Clawbacks are common in the finance industry. Many banks started putting clawback clauses in employee contracts after the 2008 financial crisis as a way to recoup money in cases of mistakes or discrepancies in accounting. They also instituted clawbacks as a way to help restore the public’s confidence in financial institutions. For example, choosing a reliable bank is important when you’re looking for the best savings account for your needs. Clawback clauses are often included in employee contracts for top executives, but they may be included in contracts for other employees as well.Recommended: 10 Key Benefits of Opening a Savings Account

How Clawbacks Work

Clawbacks are typically invoked in instances of employee misconduct, fraud, or poor performance. An employer might also put a clawback into effect if there is a drop in the company’s profits.Here’s another example of how a clawback might function: Let’s say a company gives a bonus to an executive as a reward for performance. But later, it’s discovered that the bonus was calculated incorrectly. Under a clawback provision, that executive can be required to return all or part of the bonus, which they might have already deposited in their checking or savings account.A clawback may come with a penalty and require the employee to pay back additional funds on top of the money they need to return to their employer. Clawback clauses typically must be in writing, and they are generally not subject to negotiation.Recommended: How Many Bank Accounts Can and Should You Have?

When Clawbacks Are Used

As mentioned, top executives are most likely to have a clawback clause in their contracts. However, a company might also decide to include clawback provisions in the contracts of other employees who are key, such as those who prepare a firm’s financial statements.The intent of a clawback is to protect the company against fraud or misconduct. It can also act as a deterrent against wrongful behaviors, such as misrepresentation of a company’s performance or revenue. And a clawback could help show consumers and investors that a company is acting responsibly.Recommended: What is FDIC Insurance?

How Clawbacks Started

The first federal law regarding clawbacks was in 2002. The Sarbanes-Oxley Act specified that companies could utilize clawbacks to recoup incentive-based compensation from CEOs and CFOs in the case of incorrect financial reporting or misconduct.In 2008, after the financial crisis, as part of the Emergency Economic Stabilization Act, the scope of clawbacks was expanded to include not just a company’s executive officer, but also 20 of the next highest-paid employees. Clawbacks could be used when financial reporting was determined to be inaccurate. However, the law applied only to companies that received funds under the Troubled Asset Relief Program (TARP). Recommended: Breaking Down Bank Account Types

How Common Are Clawbacks?

Today, more and more companies of all kinds are using clawback clauses. For instance, data shows that more than 90% of companies in the S&P 500 have clawback provisions in their contracts. And clawbacks may become even more common going forward. In October 2022, the Securities and Exchange Commission (SEC) approved a ruling first proposed in 2015 as part of the Dodd-Frank Financial Reform Legislation that requires all companies listed on the stock exchange to have a clawback policy for incentive compensation for current and former employees in case they have to do “an accounting restatement” to correct errors.

Types of Clawbacks

Businesses and some government agencies may use clawback clauses to cover a variety of scenarios. These might include:

Incentive-based Compensation

This compensation includes things like bonuses and stock options and may be used if an executive commits some kind of misconduct or fraud, or if their performance is considered below par. A clawback might also be invoked if an employee is given a signing bonus after joining a company and leaves shortly thereafter, or if they resign and go to work with a competing firm within a certain period of time, as specified in the contract.

Dividends

In some situations, such as bankruptcy, dividends paid to investors in a project might be subject to a clawback.

Life insurance

A clawback could also apply to some life insurance policies. For instance, if you cancel your policy, a clawback provision might specify that any benefits received need to be repaid.

Pension

In cases of fraud or misrepresentation, pension funds may be clawed back.Recommended: How Much Does the Average American Have in Savings?

Could a Clawback Apply to Me?

If you’re a top executive at your company, or an employee who deals with the company’s financial matters, a clawback might apply to you. Plus, clawback clauses are starting to show up in more employee contracts overall. To find out if you might be subject to a clawback, review your employment contract and look for a clawback clause. In the future, whenever you’re signing an employment contract, read it carefully to see if there’s such a clause. Even if there is, you may not be able to do much about it since clawbacks tend to be non-negotiable. But it’s best to know what you're dealing with. If you have any questions, direct them to your employer and make sure you fully understand the clawback clause.Recommended: Bank Error in Your Favor: What Happens Next?

The Takeaway

Clawbacks allow companies to recover money from certain employees in cases of misconduct, fraud, or poor performance, or if the company experiences loss of revenue. Clawbacks are becoming more common in contracts for executives and some other employees in many businesses. And a new ruling will likely increase their use. Clawbacks may help instill consumers’ trust in organizations such as banks. And that’s critical when choosing a bank to deposit your money. If you’re currently looking for a bank that’s FDIC-insured and that offers a high return on your savings, Lantern by SoFi can help. Our online banking marketplace makes it easy to compare high-yield savings accounts by APYs (annual percentage rates) and balance minimums.Compare high-interest savings accounts with Lantern.