Business-Minded Legal Solutions

What is a clawback provision in an employment context?

Your company has to attract talent. It’s how it grows and flourishes. The right employee or executive can give your business the edge it needs to be successful.

This demand for talent means successful individuals will command a high salary. CEOs and leadership positions often come with hefty paychecks and bonuses. But what can a company do if these high-paid executives fail to deliver what they’ve promised? Or worse still, mislead investors? That’s where clawback provisions come in.

These provisions allow companies to recoup money spent on performance bonuses or services that weren’t actually delivered. If your CEO earns a bonus for growing your company’s revenue by at least five percent but later assessment finds the number had been inflated, a clawback can undo that expense. The provision allows you to recoup that bonus as well as penalties stemming from it.

Clawback provisions have been gaining in popularity. From 2005-2010, the number of Fortune 100 companies who used these provisions went from five percent to 82 percent. The reason is simple: it pays to reduce risk. A clawback provision can protect companies from some of the risks of expensive employees.

In fact, businesses have come to use clawbacks in a number of circumstances: companies are deploying these provisions while working with government contractors, insurance companies have begun using them to protect against fraudulent life insurance policies and some companies even use them on pension plans.

By including a clawback provision in an employment or services contract, your company can protect itself from risk. If anything goes wrong, you then have a basis to recoup your costs as well as additional penalties.

In today’s competitive business environment, companies need to do everything they can to protect themselves and gain an advantage. Clawback provisions in employment contracts can be an easy way to protect your company from a wide variety of cost risks.

Business law is complex and constantly evolving. If you have any questions, a knowledgeable business attorney can help.