What is it?

A clawback refers to the recovery of money which has been already paid to a person or company, typically because that payment should not have been made for legal (or occasionally moral) reasons. It can also refer to the recovered money itself. Clawback provisions in a contract may entitle a party (e.g. the company’s shareholders or creditors) to claw back (= recover) excessive salaries or bonuses paid to the company’s directors, for example, if it can be shown that those payments damaged the company’s ability to fulfil its commitments to that party. As the news headlines below suggest, the expression is usually used in a compound noun (e.g. clawback provisions, clawback clause) or as a phrasal verb (to claw sth back).

Why is the term in the news?

Many companies around the world, especially financial institutions, have recently been bailed out (rescued) by huge injections of taxpayers’ money. When the same companies then pay large amounts of money in the form of bonuses or pensions to their own managers and directors, it can generate widespread public anger. Recent examples include AIG in the US, which caused an outcry by paying bonuses worth $218 million to its executives in March, despite earlier having received a $170 billion rescue package from the government. In the UK, the former boss of Royal Bank of Scotland obtained a pension worth £16.9 million shortly before the bank had to be rescued from bankruptcy by the government. In both cases, the government has attempted to claw back some of the money either directly (in the case of the bonuses, which may have to be repaid) or indirectly (in the case of the pension, where the directors who negotiated it may be sued).

How can I use it in class?

Discussion:

• Why might a company include a clawback provision in its executives’ employment contracts? (See Treasury and Risk article below).
• What are the legal and moral arguments for and against clawing back bonuses from executives? (See New York Times article below).
• Which should be given more respect in such cases, public anger over an apparent injustice or the fulfilment of contractual obligations (e.g. to pay a bonus)?

Writing:

• Students write a clawback clause to be inserted in their bosses’ employment contracts.
• Students write a letter from a boss to executives, recommending that the executives repay their bonuses for the sake of public relations.

Where can I read about it?

• AIG Forced To Pay Back Billions in Bonuses, Sky, 18th March 2009.
• The Case for Paying Out Bonuses at A.I.G., New York Times, 16th March 2009.
• Gordon Brown vows to 'claw back' bonuses amid backlash against the bankers, Times, 13th February 2009.
• Ministers 'to sue' RBS directors over Sir Fred Goodwin's pension, Telegraph, 18th March 2009
• Banks to claw back £27bn by raising rates, Telegraph, 12th March 2009.
• Merits of executive pay clawback clause, Times, 6th March 2009.
• Clawback provisions soar, Treasury and Risk, 1st August 2008.