Clawback Policy

The two tools work at different stages. Malus cuts or cancels deferred pay that has not yet vested. Clawback demands money back after it has been paid, sometimes years later. Triggers are written in advance and typically include misstatement of results, serious misconduct, breach of risk limits or a failure of oversight. Some rules apply regardless of personal fault, others require the executive to have been responsible. The remuneration committee decides and, in some markets, securities rules or financial regulators require such policies. Practical problems include enforcing recovery after pay has been spent, tax treatment and employment law. Executives who know unearned bonuses can be reclaimed have a reason to look harder at the figures they sign.

A company restates three years of profit after finding that managers booked sales early. Executives had received bonuses based on the original figures. Under the clawback policy, the remuneration committee recalculates the bonuses on the restated profit and demands repayment of the excess from the finance director and the head of the division, and cancels their unvested shares.