Clawback

Following the 2008 financial crisis, many politicians argued that shareholders should have greater rights to engage in the clawback of executive compensation. A clawback is a process of taking back money or other benefits that have been paid out.

Typically, a clawback provision is a penalty for underperformance, illicit activity, or any other actions that significantly impact an organization’s reputation.

Clawbacks have been successful in the past due to accounting errors or financial fraud. Clawbacks became popular tools in CEO and CFO compensation following the passage of the Sarbanes-Oxley Act of 2002, a law enacted in the wake of the collapse of Enron.

The Emergency Economic Stabilization Act of 2008 extended clawback provisions to the top 20 highest paid employees at organizations that received funds from the Troubled Asset Relief Program (TARP).