Clawbacks

A clawback is a contractual provision or policy that requires the return of money, benefits, or other value that has already been paid or granted. Clawbacks are used to address misconduct, misstatement of performance, or failures to meet conditions that justified the original payment, and they seek to align incentives with long-term outcomes.

In corporate governance, clawbacks are common for executive compensation. If cash bonuses, equity awards, or other incentive pay were based on metrics later found to be inaccurate or achieved through misconduct, the company may recover all or part of the payment. Regulations in some jurisdictions, such as the Dodd-Frank Act in the United States, encourage or require clawback policies for incentive-based compensation following a financial restatement.

In private markets, clawbacks regulate distributions of profits. For example, carried-interest arrangements in private equity often include a clawback provision to ensure that general partners return some portion of earlier profits if later losses or underperformance reduce total earnings.

Clawbacks also appear in government programs and taxation. Overpayments of benefits or subsidies can be recouped; tax credits or deductions may be subject to recapture if eligibility conditions change; and grant-award programs may require repayment if project milestones are not met.

Enforcement can be complex, requiring timely detection, accurate calculation, and legal action to recover funds. Critics argue that clawbacks can be punitive, create uncertainty, and deter risk-taking, while supporters view them as essential checks against improper payments and misaligned incentives.

Clawbacks span corporate, financial, and public contexts and continue to evolve with changing laws and policy aims.