Clawback provisions are on the rise in employment contracts. Particularly, within the finance and banking industry. However, many employees do not fully understand what these clauses are, and if they apply to them. Read on to develop a more comprehensive understanding of these provisions within an employment context.
What is a clawback?
A clawback is a provision in a contract that is often non-negotiable. When an employer recalls money they have already paid to an employee, the clawback provision will be triggered. Employment contracts with some form of incentive-based pay, such as bonuses, are the typical agreements with a clawback provision. However, it is important to note, that a clawback is not a refund or repayment, rather it is a punishment.
How do they work?
Clawback provisions are typically triggered in response to:
- Misconduct
- Fraud
- Erroneous financial reporting
- Poor performance
- Decreased Profits
- Other exceptional circumstances
For example, Wells Fargo’s board of directors decided to clawback USD$41 million from ex-CEO John Stumpfy when he resigned in 2016 due to sales practice problems. In 2017, the board announced a further clawback of USD$28 million from Stumpfy.
Who do they apply to and why are they used?
Employment contracts for executives and other high-level management positions are generally the agreements that include a clawback provision. This is because remuneration plays an important role as an accountability tool. For context, clawbacks rose to prominence in the aftermath of the global financial crisis. This accountability tool allowed many financial institutions to demonstrate a renewed commitment to holding their executives accountable for their actions (or lack of action). This was particularly relevant to the perception of shareholders, investors and the general public. In the United States, clawback provisions were first enshrined in law back in 2002 under the Sarbanes-Oxley Act. However, various companies are rolling out new clawback provisions in response to proposed new sections under the Dodd-Frank Act.
The Australian Context
Although not overly popular in Australia currently, they are becoming increasingly relevant in response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The Australian Prudential Regulation Authority released a discussion paper in 2019 proposing the introduction of clawbacks for senior roles in significant financial institutions. The intention here is to better align the interests of financial institutions and the broader community. Shifting executive focus away from short-term financial performance is another argument for these clauses. This would allow for improved investor confidence.
Should I be worried about them?
The short answer is it depends. It depends on your role, your company, your employment contract, and to some degree, your industry. You should search for such a clause in your contract if you are joining a financial institution as an executive. It is important to also note, that you don’t necessarily have to be directly involved with the triggering action for a company to demand a clawback. Should you be concerned about a potential clawback clause in your employment agreement, you should consult with a lawyer.
Clawback provisions are slowly rising to prominence in Australia in response to the 2019 Royal Commission. These clauses give employers the power to recall money they have already paid to certain employees. Clawbacks are an accountability tool that promotes proper conduct and good governance. Employees should take the time to understand whether this clause is evident in their own employment agreement.
