The executive pay “clawback,” an idea that had its debut during the discussion around the passage of the Sarbanes-Oxley Act in 2002, has become an increasingly common provision in executive compensation packages. In theory, clawback policies enable companies to recover incentive pay granted to executives for achieving financial performance targets on the basis of decisions and actions that subsequently turn out to be ethically and legally questionable, and which impose significant monetary and reputational liabilities on the company.
Why Executive Compensation Clawbacks Don’t Work
And how to fix them.
March 22, 2021
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Summary.
Clawback provisions are a common feature in executive compensation packages. They are intended to deter executives from boosting their incentive compensation entitlements by taking decisions that could impose legal or reputational costs on the company. But if executives cash in their compensation and then leave the company clawbacks can be almost impossible to enforce. Requiring incentive compensation for executives to be made in restricted stock or option grants whereby the compensation can only be cashed out six to 12 months after the executive has left the company will leave the company in a better position to recover compensation if it needs to.