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

• Published date: 01 January 2018
• Author: Carol E. Vann,Gregory L. Prescott
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/jcaf.22312

59

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22312

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Implications of Clawback

Adoption in Executive

Compensation Contracts:

A Survey of Recent Research

Gregory L. Prescott and Carol E. Vann

One important

consideration

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,

2015).

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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