A clawback is a contractual provision under which money that’s already been paid out must be returned to an employer or another type of organization under certain conditions. A clawback may also involve a penalty in addition to the repayment. A clawback can be utilized across a broad spectrum of organizations including public companies, bankruptcy courts, insurance companies, Medicaid, and government agencies.
The primary goal of a clawback provision is to deter individuals/organizations from presenting inaccurate financial results, such as giving incorrect accounting information. A clawback can occur following an audit of financial results when it is found that the results were overstated. Clawbacks are also used to provide a mechanism for recovery of funds that should not have been paid and to raise the confidence of investors/consumers that reported results are correct.
Examples of Clawback Uses
Occasions in which clawbacks can be used include the repayment of:
- Incorrect executive bonuses that resulted from overstated financial results,
- Benefits/payments for insurance policies that have previously been canceled,
- Dividends that have been distributed after an organization files for bankruptcy,
- Advance Medicaid payments for long-term care at nursing homes when a recipient is deceased.
In the case of executive bonuses, there is a question whether individuals who are subject to clawback provisions may try to offset the risk of the clawback by negotiating a higher base salary that is not subject to a clawback provision.