Whether you are drafting a contract for a new executive hire or you are considering signing a contract to join a major corporation, it is essential that you understand all components of the contract before signing. Coming across certain terms, such as ‘clawback provision,’ may spark confusion and uncertainty. Yet, the term is used in many types of contracts in many industries across the U.S. 

According to Business Insider, the number of clawback provisions included in contracts rose from 3% in 2005 to 82%in 2010. Many corporations now include clawback provisions in their contracts as a way to protect their investments should something go awry. This clause allows companies to take back their money should unseen events occur. 

Retracting incentive pay 

Many companies offer bonuses or incentive pay if certain goals within the company are reached. For example, a corporation may pay a $20,000 bonus to an executive who increases company sales by 10%. Once the goal is met, the bonus is paid to the employee. Yet if additional information brings light to the fact that the goals were not actually reached, clawback provisions allow companies to reclaim bonuses that have already been paid out. 

The money may be retracted if employee misconduct occurs or as another means of punishment for wrongdoing within the company. 

Stating the facts 

Keep in mind that not all types of pay are eligible for clawback provisions. The Securities and Exchange Commission initiated a rule that clawbacks should be used in cases where a company’s financial statements are changed due to accounting errors. Yet, employee wages and 401k plan contributions are immune from these take backs. 

If you include a clawback provision in an employee contract, be clear and concise on the terms of the agreement. This will protect your ability to reclaim incentive pay should something go wrong.