what is a clawback 
a clawback is a contractual provision requiring that money that s already paid to an employee must be returned to an employer or benefactor sometimes with a penalty many companies use clawback policies in employee contracts for incentive based pay such as bonuses they re most often used in the financial industry most clawback provisions are non negotiable clawbacks are typically used in response to misconduct scandals poor performance or a drop in company profits investopedia mira norianunderstanding clawbacksclawback clauses have become more common since the financial crisis of 2008 because they allow a company to recover incentive based pay from ceos in the case of misconduct or any discrepancies in the company s financial reports clawbacks are also written into employee contracts so employers can control bonuses and other incentive based payments the clawback acts as a form of insurance in case the company needs to respond to a crisis such as fraud or misconduct or if the company sees a drop in profits the employee must also pay back monies if the employer feels that their performance has been poor clawbacks are different from other refunds or repayments because they often come with a penalty an employee must typically pay additional funds to the employer when a clawback goes into effect clawback provisions prevent people from using incorrect information and they re used to put a balance between community development and corporate welfare they can help to prevent the misuse of accounting information by employees in the financial industry clawbacks are considered an important part of the business model because they help to restore the confidence and faith of investors and the public in a company or industry banks implemented clawback provisions following the financial crisis as a way to correct any future mistakes by their executives clawbacks and executive compensationthe sarbanes oxley act of 2002 was the first federal statute to allow for clawbacks of executive pay it provides for clawbacks of bonuses and other incentive based compensation paid to ceos and cfos if misconduct on the part of the company and not necessarily the executives themselves leads it to restate financial performance the emergency economic stabilization act of 2008 was amended in 2009 it allows for clawbacks of bonuses and incentive based compensation paid to executives 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 the law only applies to companies that received troubled asset relief program tarp funds a proposed securities and exchange commission sec rule was proposed in july 2015 it was associated with the dodd frank act of 2010 and 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 don t have such clawback provisions written into their contracts from listing 1this rule was approved on oct 26 2022 2clawbacks in private equitythe term clawback can also be found in some other settings it refers to the limited partners right in private equity to reclaim a portion 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 clawbacks may not even refer to money in some cases lawyers can claw back privileged documents that were accidentally turned over during electronic discovery the term clawback also refers to a fall in a stock s price after it increased examples of clawback provisionsseveral 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 they can take back bonuses that have already been paid out some of the most common clawback provisions used by corporations insurance companies and the federal government include 