Ever heard of clawback purgatory? We don’t recommend it. The never ending loop of delivering bonuses, losing talent too soon, fighting to get unearned bonus amounts back from said talent ... so, how do you break the cycle?
Clawbacks (contractual provisions whereby money already paid to an employee must be repaid to the employer often with a penalty attached) have always been common in financial firms. A clawback would be triggered if, say, an executive overinflated his or her performance and didn’t actually hit agreed-upon goals.
Since the financial crisis of 2008, however, clawback provisions have become more common with agreements centered on incentive based pay. Imagine you’ve paid out a retention or performance bonus to an employee who leaves their job soon after. Not only do you now have to deal with the cost of attrition, you may also need to recover a portion, or all, of that bonus pay.
That period of time before recovering the appropriate funds is what we mean by “clawback purgatory.” At best, it’s an unpleasant, brief exchange. At worst, it’s a drawn out back and forth taking weeks, months (or longer) to resolve.
So how can you break free? Here are 3 proactive steps to help you avoid or save yourself from clawback purgatory:
- Give maximum value.
Money talks. Bonuses paid upfront as one lump sum that vests over time says something different to employees than bonuses doled out in small increments over months or years. Access to a lump sum of cash with no spending stipulations means employees can use those funds in a way that delivers personalized value: pay off debt, make a large purchase, invest in retirement savings, etc. Providing that kind of financial change to an employee’s life says they are valued tremendously by their employer. Loyalty often follows feeling valued - and employees who don’t leave are employees who don’t trigger clawbacks.
- Get it in writing.
Bonus compensation is often tracked manually and when an unexpected hurdle comes up, like enforcing a clawback, it’s that much more work for a company’s financial, HR, or payroll team. Outlining the expectations and what is and is not permissible in contracts regarding clawbacks can vary by state and something this important can’t be crafted with a few cursory Google searches. It’s not always possible to have in-house legal staff, but companies should at least consider partnering with a reputable firm to make sure all compensation agreements and paperwork is distributed formally and is enforceable.
- Hire back-up.
Typically, employees make up the bulk of a company’s budget. Time spent chasing the finances of a handful of past employees is time spent away from supporting the biggest company asset: employees who are still contributing and forwarding the mission. Help your HR and finance teams focus on what matters by leveraging a platform to automate clawbacks and collections for you.
In a perfect world, clawbacks don’t happen because employees feel valued in the workplace and stay with their employer. Or, if they leave, they do so without any outstanding financial obligations. Our world is far from perfect, though, so companies need to have a structure and plan to avoid staying in clawback purgatory forever.
Keep Financial enables customers to design custom, scalable bonuses and gives them access to a fully digital platform designed to help them deliver compensation and automate manual processes like communicating milestones and managing clawbacks.
If you’re stuck in clawback purgatory, we’ll help break you out. Contact us to learn how.