Everything You Want To Know But Hope You Never Have To Use About Clawbacks

Writing in FCPAblog, Richard Cassin discusses clawbacks, their legal basis and whether they are a good idea. The answer is yes, generally speaking, but there are some unintended consequences. The DOJ and SEC have never publicly said they expect companies to impose clawbacks. Current or prospective executives might respond to clawback provisions by raising their salary demands. So-called “clawback premiums” inflate executive compensation, thereby hurting shareholders. In a 2017 domestic bribery case, United Airlines said it wouldn’t impose executive clawbacks because doing so would hurt its ability to recruit future executives. If a company has clawback rights but doesn’t exercise them there is a negative implication, and boards are often reluctant to enforce clawbacks. They are uncomfortable “adjudicating” guilt, and could be accused of selective enforcement, or denying due process.