Implications of Clawback Adoption in Executive Compensation Contracts: A Survey of Recent Research

Published date01 January 2018
Date01 January 2018
© 2018 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22312
Implications of Clawback
Adoption in Executive
Compensation Contracts:
A Survey of Recent Research
Gregory L. Prescott and Carol E. Vann
One important
in the design
of a compensation
contract is to provide
incentives for execu-
tives to make busi-
ness decisions that
are in the best interest
of their firms. How-
ever, contract terms
often have intended
as well as unintended
consequences. For
example, when
bonuses are overly
dependent on short-
term reported earn-
ings, executives may
have incentives to
manipulate reported
earnings to increase
their bonuses. To
address this possibil-
ity, Section 954 of
the Dodd–Frank Wall Street
Reform and Consumer Pro-
tection Act of 2010 (referred
to as Dodd–Frank) requires
that publicly listed firms adopt
compensation recovery policies
(often referred to as
clawback provisions)
for recapturing exec-
utive officers’ excess
incentive compensa-
tion in the case of a
financial statement
restatement (Chen,
Greene, & Owers,
A clawback
provision is a com-
ponent of an execu-
tive’s employment
contract that calls
for the executive to
reimburse his or her
employer if a trig-
gering event speci-
fied in the clawback
provision occurs. A
frequently used trig-
ger is the need to
restate incorrectly
reported earnings (a
restatement-triggered recoup-
ment provision); it is not neces-
sary that the restatement be the
While clawback provisions have been used in
legal cases for decades, only after the passage
of the Sarbanes-Oxley Act of 2002 and the Dodd-
Frank Act of 2010 has the idea of clawback provi-
sions in executive compensation contracts begun
to talk hold in the U.S. Although the Securities and
Exchange Commission has yet to implement final
rules regarding clawback provisions for public
companies, in recent years academic research-
ers have begun to investigate how the voluntary
adoption of clawback provisions might impact
financial reporting quality, compensation paid to
covered executives, firm value, and a host of other
firm-level factors. The purpose of this article is to
review select relevant clawback research pub-
lished in premiere accounting and finance aca-
demic journals in recent years to better gauge the
implications of clawback adoption and to attempt
to discern any corporate governance effects of
clawback adoption. © 2018 Wiley Periodicals, Inc.
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