Clawback

Let's play a little game of Put Yourself in Someone Else's Shoes, shall we? Humble reader, your chosen career is now that of politician. You've kissed enough babies to become a high-ranking official on the council for the city of Metropolis. Well done! There's just one problem: over the past few years, Metropolis' economy has gone down the tubes. It's not your fault this has happened, but your constituents expect you to do something about it. What do you do to keep yourself from being voted out? (THINK FAST!)

One popular solution is to offer economic subsidy packages to major corporations interested in basing themselves in your region. Such development would pump lifeblood into the local economy, not only by creating jobs directly, but also through a corresponding ripple effect of the service economy.

In 2001, Boeing announced its plan to move its corporate headquarters out of Seattle to one of three potential sites-- one in Dallas, one in Denver, and one in Chicago. Dallas offered Boeing $14 million. Denver offered Boeing $18 million.

Chicago offered Boeing $56 million.

Guess which site Boeing chose?

The emotionally connotative term "clawback" is frequently used by those who move in economic development circles to refer to a certain type of provision one finds from time to time in packages like the one that was offered to Boeing. This provision is best understood as a community's chance for a refund. For example, if analysts have reported that the company that wishes to relocate to Metropolis is going to create 800 permanent new jobs by doing so, as a city official, you would be extremely interested in subsidizing Company X. But if you're smart, the deal you offer will contain a caveat, stating that if the move ends up creating fewer than 500 full-time jobs, at least some of the subsidy will need to be repaid. (This sort of forethought is especially necessary if the paychecks of the analysts in question were signed by Company X.)

When it came to Boeing's relocation from Seattle, the Illinois legislature was willing to offer them the following goodies:

• $1.5 million earmarked for technology and capital improvements
• $2 million for job training
• $8.6 million towards "relocation expenses"
• $1 million of sales tax exemption
• $17 million in corporate income tax credit
• $16 million in property tax abatement over a twenty year period
• $1 million to buy out the lease of the site's previous owner
• $2 million for energy costs
• $4.3 to $6 million in local tax reimbursements over a twenty year period
• a new heliport located in downtown Chicago, and necessary improvements at Midway International Airport to sustain Boeing's fleet of twenty jets

Chicago mayor Richard M. Daley and his subordinates cooked up an additional set of subsidies that brought the total of the package deal up to $56 million. However, on September 12, 2001, "city deputy planning commissioner Robert Kunze told Cook County Board's finance committee that if Boeing's headquarter jobs fall below 500 the city will cut the amount it reimburses for property taxes. If the number falls below 400 for 10 years, the company will have to pay back all the reimbursements."

Needless to say, given the events of the day before, Boeing was not happy to hear about the existence of this clawback.

SOURCE: Henderson, Harold. "Give Us a Break!", Chicago Reader Volume 32, Issue 28, 11 April 2003: 20.

Over the years, we’ve all probably heard the horror stories about those greedy fat cat Wall Street bankers driving their companies into the ground though a series of risky investment decisions or by just plain “cooking the books” to make it appear as if their companies are performing better than they actually are.

All you have to do is look at the recent demise of what once were considered high end companies such as Bear Stearns and Lehman Brothers and the resulting bloodbath and carnage that occurred in the financial markets that helped plunge much of the world into the 2008 fiscal crisis. The resulting job losses in the financial sector and the trickledown effect they had on the rest of the economy are still being felt in many areas today.

It makes any sane or sensible investor ask the question “Why would they do that?”

Besides just plain incompetence, part of the answer has to do with their executive compensation, namely, incentive bonuses. Unlike professional athletes whose contracts might be loaded with all kinds of performance incentives and can be measured based on their statistics, executives in many large upscale companies are beholden to no one. I take that back, they are beholden to their shareholders but their blatant disregard of them makes it a moot point. Once they looted the company of its assets they were free to float away on their golden parachute never to be seen or heard from again.

Finally, it seems that those days are changing. Many senior executives are now being forced to sign what’s known as a “clawback provision” in their contract. Simply put, if their company fails or does not perform up to expectations or has to restate their earnings, the company now has the right to “revoke, reclaim or otherwise repossess some or all of the bonus amount”. In cases of outright fraud, this could occur years after the executives beat it out the door.

We can thank the Sarbanes-Oxley Act of 2002 for getting the theory of clawbacks in place but in the early days, it was never really enforced. In 2005 only 3% of the Fortune 100 companies had forced their executives to sign contracts with the provision in place. As of 2010, that number has increased to 82%.

I don’t think there’s any statistics available about how many executives have had to fork over their once paid bonuses back to the company or what the amounts might have been. I imagine that once they’re out the door that the funds somehow become “untraceable” or are parked somewhere down in the Cayman Islands or buried in a Swiss bank account and it might be impractical to even try and recoup them.

But hey, one never knows. If the mere threat of a company clawing back its bonuses acts only as a mere deterrent to keep CEO’s and the like from conniving people out of their hard earned money, then I think it’s fulfilling its purpose.

At least it’s a step in the right direction.

Claw"back` (?), n.

A flatterer or sycophant.

[Obs.] "Take heed of these clawbacks."

Latimer.

 

© Webster 1913.

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Claw"back`, a.

Flattering; sycophantic.

[Obs.]

Like a clawback parasite. Bp. Hall.

 

© Webster 1913.

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Claw"back`, v. t.

To flatter.

[Obs.]

Warner.

 

© Webster 1913.