Equity Clawback
Table of Contents
Equity Clawback
A financial instrument issuer may repurchase a particular amount of the debts that are still outstanding by using an equity clawback. The bondholder may repurchase a particular amount of the bonds that are still outstanding by using an equity clawback. Equity offering revenues from the very first or subsequent sales are used for the refinancing.
What is Equity Clawback?
Several contexts may also use the phrase “clawback.” When used in the context of private capital, it alludes to the restricted partners’ entitlement to recoup a portion of the carrying stake held by the principals in situations where future losses result in the generalist owners receiving excessive remuneration. Whenever a fund dissolves, clawbacks are determined.
Understanding Equity Clawback
A clawback provision in a hiring agreement or another kind of deal requires benefactors to periodically reimburse benefits they earned in accordance with the benefactor’s conditions. When an individual fails to meet the requirements set by the opposing party, they are required to pay for resulting losses. It serves as a punishment for that party.
Any commercial or labour agreement must have an unavoidable phrase known as a “clawback provision.” It behaves more like a fine than a reimbursement. A clawback contract helps to keep recipients on their toes, making sure they don’t engage in misbehaviour or overstate their accomplishments.
Importance of Equity Clawback
The purpose of a clawback strategy is to help a corporation recover incentive-related salary that was given to an executive according to particular economic indicators but subsequently found to have been overpaid due to insufficient financial information containing those metrics. The reimbursement can be applied to rewards that are dependent on the business’s non-monetary results.
Some businesses may design their reimbursement policies to require both recipient wrongdoing and an updated version of the accounts receivable or rectification to non-financial measures. We observe that notwithstanding any wrongdoing, the recently implemented SEC regulations demand reimbursement in the form of a revision of monetary accounts.
Working of Equity Clawback
A clawback clause in an agreement compels a worker to repay cash that was previously given to them by the company, often with a repercussion. In the case of corruption or wrongdoing, a decline in business earnings, or subpar performance of staff, clawbacks serve as an assurance.
The clawback clause is the ideal mechanism for balancing overall return on assets across funds that are invested for restricted partners. Clawback clauses are understandably disliked by PE companies because they significantly increase the risk associated with subsequent earnings and processes, yet they seem like they are here for the taking.
Example of Equity Clawback
In order to comprehend equity clawback, consider the scenario in which a business awards an increase to a worker according to their success at work but later realises that the incentive was unjustified. Clawbacks frequently allude to cash, however, they may additionally refer to important assets that are not monetary like paperwork.
They aid in regaining the faith and trust of financiers and everyone else in a corporation or industry, which is another reason they are seen as a crucial component of an organisation’s model. For instance, banks incorporated clawback clauses in the wake of the economic downturn to make sure their leaders wouldn’t make the same mistakes again.
Frequently Asked Questions
Clawback provisions are non-negotiable clauses that can be a part of any financial contract that can between two people, companies, employees, and more. It works more as a penalty rather than a payment or a bonus. If a clawback provision is set in a contract and the opposite party fails to follow that, the party that set the clawback provision would stand to gain from that at the expense of the opposite party. The party that fails to follow the clawback provision is the one who gets the penalty.
Clawback is used by many companies to mitigate the potential risk of fraud and/or misconduct, which happened in the past. Clawback works as a safety net against fraud and possible misconduct. Also, after the global recession in 2008, an act called the Financial Recovery Act was established and companies now need to follow and implement clawback provisions. There are two sides to companies using clawbacks, the good side and the bad side. The employees would benefit from the clawback if an employee was let go from a company due to a disability, death and/or unfair reasons. However, if an employee voluntarily quits without completing the notice period, is legally terminated or breaches their contract, it’s the company that would benefit from clawbacks as they don’t need to pay the entire salary for that month.
Every country has its own form of Financial Recovery Act. In the US, it’s the American Recovery and Reinvestment Act or ARPA. In India, it’s called the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest, or SARFAESI Act. So, clawback provisions of the FRA of one country may differ from another, so keep that in mind. Here are some of the general clawback provisions of the Financial Recovery Act.
- Executive compensation
- Life insurance
- Dividends
- Government contracts
- Medicaid/Medical Insurance
- Pensions
While the promises of Equity clawbacks do sound interesting, it is not without its drawbacks. Here are some of the major drawbacks of equity clawbacks.
- Since equity clawback allows a company or a user to revoke promised funds, there is a general lack of trust and security.
- Employees who do not have union protection can easily receive a termination letter from their employers.
- If at any point, employees that signed a non-compete agreement join a competitor, they could face severe financial penalties.
Research seems to suggest that clawback provisions could be effective but it implemented voluntarily. However, if an executive employee cashes in the compensation they received and then leaves the company to join another, clawback provisions will be of no help in that case.
Related Terms
- Cost of Equity
- Capital Adequacy Ratio (CAR)
- Interest Coverage Ratio
- Industry Groups
- Income Statement
- Historical Volatility (HV)
- Embedded Options
- Dynamic Asset Allocation
- Depositary Receipts
- Deferment Payment Option
- Debt-to-Equity Ratio
- Financial Futures
- Contingent Capital
- Conduit Issuers
- Calendar Spread
- Cost of Equity
- Capital Adequacy Ratio (CAR)
- Interest Coverage Ratio
- Industry Groups
- Income Statement
- Historical Volatility (HV)
- Embedded Options
- Dynamic Asset Allocation
- Depositary Receipts
- Deferment Payment Option
- Debt-to-Equity Ratio
- Financial Futures
- Contingent Capital
- Conduit Issuers
- Calendar Spread
- Devaluation
- Grading Certificates
- Distributable Net Income
- Cover Order
- Tracking Index
- Auction Rate Securities
- Arbitrage-Free Pricing
- Net Profits Interest
- Borrowing Limit
- Algorithmic Trading
- Corporate Action
- Spillover Effect
- Economic Forecasting
- Treynor Ratio
- Hammer Candlestick
- DuPont Analysis
- Net Profit Margin
- Law of One Price
- Annual Value
- Rollover option
- Financial Analysis
- Currency Hedging
- Lump sum payment
- Annual Percentage Yield (APY)
- Excess Equity
- Fiduciary Duty
- Bought-deal underwriting
- Anonymous Trading
- Fair Market Value
- Fixed Income Securities
- Redemption fee
- Acid Test Ratio
- Bid Ask price
- Finance Charge
- Futures
- Basis grades
- Short Covering
- Visible Supply
- Transferable notice
- Intangibles expenses
- Strong order book
- Fiat money
- Trailing Stops
- Exchange Control
- Relevant Cost
- Dow Theory
- Hyperdeflation
- Hope Credit
- Futures contracts
- Human capital
- Subrogation
- Qualifying Annuity
- Strategic Alliance
- Probate Court
- Procurement
- Holding company
- Harmonic mean
- Income protection insurance
- Recession
- Savings Ratios
- Pump and dump
- Total Debt Servicing Ratio
- Debt to Asset Ratio
- Liquid Assets to Net Worth Ratio
- Liquidity Ratio
- Personal financial ratios
- T-bills
- Payroll deduction plan
- Operating expenses
- Demand elasticity
- Deferred compensation
- Conflict theory
- Acid-test ratio
- Withholding Tax
- Benchmark index
- Double Taxation Relief
- Debtor Risk
- Securitization
- Yield on Distribution
- Currency Swap
- Overcollateralization
- Efficient Frontier
- Listing Rules
- Green Shoe Options
- Accrued Interest
- Market Order
- Accrued Expenses
- Target Leverage Ratio
- Acceptance Credit
- Balloon Interest
- Abridged Prospectus
- Data Tagging
- Perpetuity
- Optimal portfolio
- Hybrid annuity
- Investor fallout
- Intermediated market
- Information-less trades
- Back Months
- Adjusted Futures Price
- Expected maturity date
- Excess spread
- Quantitative tightening
- Accreted Value
- Soft Dollar Broker
- Stagnation
- Replenishment
- Decoupling
- Holding period
- Regression analysis
- Wealth manager
- Financial plan
- Adequacy of coverage
- Actual market
- Credit risk
- Insurance
- Financial independence
- Annual report
- Financial management
- Ageing schedule
- Global indices
- Folio number
- Accrual basis
- Liquidity risk
- Quick Ratio
- Unearned Income
- Sustainability
- Value at Risk
- Vertical Financial Analysis
- Residual maturity
- Operating Margin
- Trust deed
- Profit and Loss Statement
- Junior Market
- Affinity fraud
- Base currency
- Working capital
- Individual Savings Account
- Redemption yield
- Net profit margin
- Fringe benefits
- Fiscal policy
- Escrow
- Externality
- Multi-level marketing
- Joint tenancy
- Liquidity coverage ratio
- Hurdle rate
- Kiddie tax
- Giffen Goods
- Keynesian economics
- EBITA
- Risk Tolerance
- Disbursement
- Bayes’ Theorem
- Amalgamation
- Adverse selection
- Contribution Margin
- Accounting Equation
- Value chain
- Gross Income
- Net present value
- Liability
- Leverage ratio
- Inventory turnover
- Gross margin
- Collateral
- Being Bearish
- Being Bullish
- Commodity
- Exchange rate
- Basis point
- Inception date
- Riskometer
- Trigger Option
- Zeta model
- Racketeering
- Market Indexes
- Short Selling
- Quartile rank
- Defeasance
- Cut-off-time
- Business-to-Consumer
- Bankruptcy
- Acquisition
- Turnover Ratio
- Indexation
- Fiduciary responsibility
- Benchmark
- Pegging
- Illiquidity
- Backwardation
- Backup Withholding
- Buyout
- Beneficial owner
- Contingent deferred sales charge
- Exchange privilege
- Asset allocation
- Maturity distribution
- Letter of Intent
- Emerging Markets
- Cash Settlement
- Cash Flow
- Capital Lease Obligations
- Book-to-Bill-Ratio
- Capital Gains or Losses
- Balance Sheet
- Capital Lease
Most Popular Terms
Other Terms
- Protective Put
- Perpetual Bond
- Option Adjusted Spread (OAS)
- Non-Diversifiable Risk
- Merger Arbitrage
- Liability-Driven Investment (LDI)
- Income Bonds
- Guaranteed Investment Contract (GIC)
- Flash Crash
- Equity Carve-Outs
- Cost Basis
- Deferred Annuity
- Cash-on-Cash Return
- Earning Surprise
- Bubble
- Beta Risk
- Bear Spread
- Asset Play
- Accrued Market Discount
- Ladder Strategy
- Junk Status
- Intrinsic Value of Stock
- Interest-Only Bonds (IO)
- Inflation Hedge
- Incremental Yield
- Industrial Bonds
- Holding Period Return
- Hedge Effectiveness
- Flat Yield Curve
- Fallen Angel
- Exotic Options
- Execution Risk
- Exchange-Traded Notes
- Event-Driven Strategy
- Eurodollar Bonds
- Enhanced Index Fund
- EBITDA Margin
- Dual-Currency Bond
- Downside Capture Ratio
- Dollar Rolls
- Dividend Declaration Date
- Dividend Capture Strategy
- Distribution Yield
- Delta Neutral
- Derivative Security
- Dark Pools
- Death Cross
- Fixed-to-floating rate bonds
- First Call Date
- Firm Order
Know More about
Tools/Educational Resources
Markets Offered by POEMS
Read the Latest Market Journal

Recognising Biases in Investing and Tips to Avoid Them
Common biases like overconfidence, herd mentality, and loss aversion influence both risk assessment and decision-making....

What is Money Dysmorphia and How to Overcome it?
Money dysmorphia happens when the way you feel about your finances doesn’t match the reality...

The Employer’s Guide to Domestic Helper Insurance
Domestic Helper insurance may appear to be just another compliance task for employers in Singapore,...

One Stock, Many Prices: Understanding US Markets
Why Isn’t My Order Filled at the Price I See? Have you ever set a...

Why Every Investor Should Understand Put Selling
Introduction Options trading can seem complicated at first, but it offers investors flexible strategies to...

Mastering Stop-Loss Placement: A Guide to Profitability in Forex Trading
Effective stop-loss placement is a cornerstone of prudent risk management in forex trading. It’s not...

Boosting ETF Portfolio Efficiency: Reducing Tax Leakage Through Smarter ETF Selection
Introduction: Why Tax Efficiency Matters in Global ETF Investing Diversification is the foundation of a...

How to Build a Diversified Global ETF Portfolio
Introduction: Why Diversification Is Essential in 2025 In our June edition article (https://www.poems.com.sg/market-journal/the-complete-etf-playbook-for-singapore-investors-from-beginner-to-advanced-strategies/), we introduced...