Understanding the 'Claw Back' Provision

By Robert Weiss

Executives at seven major financial institutions that either collapsed, were sold for distressed prices, or bailed out by the government via the taxpayers, received a total of $464 million in performance pay since 2005. These same firms reported losses of $107 billion since 2007 due to their own missteps and a spiraling economic downturn. A growing trend is to demand that executive compensation received shortly before problems emerged be given back. This is a concept known as 'claw back.' "There is a fine line that separates fair compensation from stealing from the shareholders," says Frederick Rowe, a money manager in Dallas, in addition, a founder of Investors for Director accountability. "When management ignores that line or cannot see it, then you should be required to give the money back." Corporate boards say they encouraged superior performance, and therefore bonuses were directly tied to benchmarks like profitability. Currently there is no legal mechanism for forcing the payback of past compensation, so such efforts would be needed to be bolstered by new legislation. With a public backlash against excessive pay and bonuses, the idea of recouping compensation known as 'claw back' is gaining traction. [more...]