Posted: January 18, 2022
For those who are unfamiliar, a Clawback is a provision in a contract that states that an employee must return money back to an employer. In most cases, the employee will also have to pay a penalty. These types of clauses are generally used in the event of misconduct, scandals, or poor performance on behalf of the employee. Clawbacks are most commonly used with incentive based compensation such as bonuses or stock options. For example, let’s say that a CEO tweaked their company’s reporting metrics. They manipulate the accounting statements to show improved profits, when profits had not really improved. This helps the CEO receive a $10 million bonus. The following year, an audit reveals the wrongdoing of the CEO. In this scenario, the board could implement the clawback clause and attempt to reclaim the $10 million that they paid the CEO. On the other hand, let’s say that the audit revealed no evidence of wrongdoing. It turns out that the CEO had simply changed the company’s reporting style to a new system that was much more streamlined. This helped reduce overhead/expenses, which increased the company’s profit. In this case, the Board would have no case to institute the clawback clause and the CEO would be entitled to his $10 bonus. Essentially, clawbacks are a way of holding executives accountable. They are used fairly frequently, especially at larger organizations. Recently, the clawback clause was used at McDonald’s. Steve Easterbrook’s Story Steve Easterbrook served as McDonald’s CEO from 2015-2019. In 2019, he was fired after it was revealed that he had entered into a relationship with an employee. The relationship was consensual and Easterbrook insisted that it was a one-time occurrence. After examining his phone, the Board of Directors discovered no other examples of wrongdoing. Due to this, he received a separation agreement that allowed him to keep tens of millions in stock-based compensation. However, later in 2020, an anonymous tip revealed that Easterbrook had previously had relationships with three other employees. The Board, under duress from investors, stated that they would not have allowed him to keep his stock-based compensation had they known about the extent of Easterbook’s wrongdoing. They instituted the clawback clause and Easterbrook was forced to return $105 million. To learn more about maximizing executive compensation, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.