Clawback

In private equity, carried interest may be paid to the manager on early profitable investments. If later investments perform poorly and the fund as a whole does not meet the agreed return, a clawback requires the manager to return the excess, so that it does not receive more than its agreed share of overall profits.

For example, a manager receives 10,000,000 in carried interest from early successful deals, but later losses mean it was entitled to only 6,000,000 over the whole fund. A clawback requires it to return 4,000,000 to investors.

In companies, clawback policies allow boards to recover bonuses or incentive pay from executives if financial results are later restated or if executives are found to have engaged in misconduct. In the United States, stock exchange rules adopted under the Dodd-Frank Act require listed companies to have policies to recover incentive pay after accounting restatements.

The term is also used in other contexts, such as governments recovering funds from businesses that fail to meet grant conditions.