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What is a Clawback Provision?

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Used in a sentence

The Daily Ledger · Markets

Following the accounting restatement, the board triggered the executive clawback provision.

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Explained in three depths

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Overview

A clawback lets a company take back money it already paid out, most often executive bonuses. It gets triggered when the results those payments were based on turn out to be wrong.
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Overview

A clawback is the company's "actually, return that bonus" button. Profits get restated, the numbers that earned the bonus evaporate, and the money gets un-paid. Yes, even if it's already a boat. 😎

A quick take β€” often all you need.

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Detail

Typical triggers are financial restatements, misconduct, or fraud, so if the profits that earned the bonus get corrected downward, the bonus follows. Rules tightened sharply after the 2008 crisis, and U.S. listed companies are now required to maintain clawback policies that recover incentive pay after a restatement, even when the executive did nothing wrong personally. The same mechanism appears in private equity, where fund-level clawbacks return carried interest to investors if early winning deals are followed by losses. The hard part is practical, because the money is usually spent, so enforcement can mean repayment schedules or court. That's why boards treat triggering one as a headline-making step rather than routine housekeeping.
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Detail

Post-2008, regulators made this mandatory for listed companies: restate your financials, and incentive pay tied to the old numbers has to come back. There's no "but I didn't know" defense, because the math alone triggers it. PE funds run the same play on carried interest when early wins turn into later losses. The messy part is collection, because bonuses have a way of becoming kitchens and tuition. Which is why "the board triggered the clawback" is never a quiet sentence. 😎

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Analogy

A cyclist wins a race, takes the prize money, and spends it. Two years later a doping retest fails, the title is stripped, and the money must come back whether it was spent or not. A clawback is that rule, agreed in advance.
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Analogy

It's getting a scholarship for your 4.0, spending it on a car, and then the school discovers the transcript had someone else's grades on it. They don't care about the car. The scholarship un-happens.
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AI explanations may contain errors · Not professional advice

Formal definition β€” The same term, explained the usual way

A clawback provision is a contractual or policy mechanism permitting the recovery of previously disbursed compensation upon the occurrence of specified events, most commonly financial restatement, misconduct, or breach of covenant. Under current U.S. listing standards, issuers must adopt policies providing for recovery of erroneously awarded incentive-based compensation from executive officers following an accounting restatement, on a no-fault basis. Analogous provisions in private fund agreements require general partners to return excess carried interest where aggregate fund performance falls below distribution thresholds.

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