Clawbacks in economic development
Encyclopedia
In finance
economics, a clawback is when an organization (typically a financial firm) that is attempting to recover from a catastrophic shift and/or collapse (e.g., the current worldwide financial crisis) attempts to essentially "tame" its past practices
by giving its most highly-paid employees bonuses in pay that are deferred rather than bonuses that are able to be spent by an individual immediately.
These deferred bonuses are, in a clawback scheme, intentionally held by the firm away from the employee(s) for years, and are tied specifically to the performance (or lack thereof) of the financial product(s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the deferred bonuses are then paid out to the individual. However, if the product fails, and damages the nature of the firm -- even years down the line from the product's inception -- then the firm has the inherent right to revoke some or all of the bonus amount(s).
According to a December 2010 New Yorker
magazine article, the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are presently taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the recent past) and to appropriately punish any potential future activity of a similar or identical sort. However, the case is made in this article (which cites several professional economists who agree with its perspective) that it is probably unlikely that either result will become the case, and the article also alleges that the people making this argument may not even truly believe it, but are instead promoting it as a sort of public relations
tactic until such time as the impact of the financial crisis fades and similar (perhaps near-identical) abuses of the financial system can slowly and quietly resume, with minimal or no detection by outside forces.
s, abatement
s, refunds and grants
. Clawbacks are distinguished from repayments or refunds as they involve a penalty
in addition to a repayment. The use of tax incentives for attracting jobs and capital investment has grown over the past twenty odd years to include performance measures from which to gauge a company's growth. Typical measures are:
Other more unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit or the requirement to bring a given technology to a commercial market. If a recipient fails to meet one or more performance measures defined in an executed incentive contract within a given time, a clawback can be initiated by the granting authority. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, the triggering of clawbacks for non performance will likely become more ubiquitous.
. They are highly controversial and are utilized as community based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
economics, a clawback is when an organization (typically a financial firm) that is attempting to recover from a catastrophic shift and/or collapse (e.g., the current worldwide financial crisis) attempts to essentially "tame" its past practices
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
by giving its most highly-paid employees bonuses in pay that are deferred rather than bonuses that are able to be spent by an individual immediately.
These deferred bonuses are, in a clawback scheme, intentionally held by the firm away from the employee(s) for years, and are tied specifically to the performance (or lack thereof) of the financial product(s) the individual(s) may have created and/or sold as part of his or her job expecting a high profit. If the product does indeed do well over a long period of time, and permanently improves the nature of the firm, the deferred bonuses are then paid out to the individual. However, if the product fails, and damages the nature of the firm -- even years down the line from the product's inception -- then the firm has the inherent right to revoke some or all of the bonus amount(s).
According to a December 2010 New Yorker
The New Yorker
The New Yorker is an American magazine of reportage, commentary, criticism, essays, fiction, satire, cartoons and poetry published by Condé Nast...
magazine article, the clawback phenomenon pursued by banks and other financial groups directly and/or indirectly responsible for the financial crisis has been used by the chief administrators of those institutions in order to make the case that they are presently taking tangible self-corrective action to both prevent another crisis (by supposedly dis-incentivizing the sorts of shady investment-product behavior displayed by their people in the recent past) and to appropriately punish any potential future activity of a similar or identical sort. However, the case is made in this article (which cites several professional economists who agree with its perspective) that it is probably unlikely that either result will become the case, and the article also alleges that the people making this argument may not even truly believe it, but are instead promoting it as a sort of public relations
Public relations
Public relations is the actions of a corporation, store, government, individual, etc., in promoting goodwill between itself and the public, the community, employees, customers, etc....
tactic until such time as the impact of the financial crisis fades and similar (perhaps near-identical) abuses of the financial system can slowly and quietly resume, with minimal or no detection by outside forces.
Background
In the past clawback phenomena have been used primarily in securing tax incentiveTax incentive
A tax incentive is an aspect of the tax code designed to incentivize, or encourage, a certain type of behavior. This may be accomplished through means including tax holidays, tax deductions, or tax abatements...
s, abatement
Abatement
Abatement may refer to:*Abatement of debts and legacies, a common law doctrine of wills*Abatement in pleading, a legal defense to civil and criminal actions based purely on procedural and technical issues involving the death of parties...
s, refunds and grants
Grant (money)
Grants are funds disbursed by one party , often a Government Department, Corporation, Foundation or Trust, to a recipient, often a nonprofit entity, educational institution, business or an individual. In order to receive a grant, some form of "Grant Writing" often referred to as either a proposal...
. Clawbacks are distinguished from repayments or refunds as they involve a penalty
Sanctions (law)
Sanctions are penalties or other means of enforcement used to provide incentives for obedience with the law, or with rules and regulations. Criminal sanctions can take the form of serious punishment, such as corporal or capital punishment, incarceration, or severe fines...
in addition to a repayment. The use of tax incentives for attracting jobs and capital investment has grown over the past twenty odd years to include performance measures from which to gauge a company's growth. Typical measures are:
- number of created jobs over 5 or 10 years
- annual payroll
- amount of capital investment over a similar time frame, and
- amount of depreciated value in a given time.
Other more unusual measures are retaining a headquarters at a specific site for a period of time, amount of production increase or production cost decrease per unit or the requirement to bring a given technology to a commercial market. If a recipient fails to meet one or more performance measures defined in an executed incentive contract within a given time, a clawback can be initiated by the granting authority. The recipient will be required to return the monetary value of the incentive plus a penalty and/or interest to the grantor of the incentive, usually a local or state taxing authority. As the use of incentives mature over time, the triggering of clawbacks for non performance will likely become more ubiquitous.
Implications
Clawbacks can be understood to be the contractual elements that stand between the drive for economic development and community development and the slippery slope of corporate welfareCorporate welfare
Corporate welfare is a pejorative term describing a government's bestowal of money grants, tax breaks, or other special favorable treatment on corporations or selected corporations. The term compares corporate subsidies and welfare payments to the poor, and implies that corporations are much less...
. They are highly controversial and are utilized as community based guarantees for some expectation of performance. The site location industry normally tries to eliminate or reduce any such promises as part of their negotiations.