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Manage Corporate Risk With Clawbacks

Let's get one thing out of the way: I am not Scrooge. It's way too early in the season for that anyway.

I am a firm believer in, not only a heavy-handed bonus plan, but also offering perks and incentives to drive performance and behavior. In fact, I'm all for any sort of carrot that keeps people engaged and working hard to reach excellence. That being said, I also believe that clawbacks (a disincentive of the stick variety) are a smart risk management tool that you should add to your incentive program.

Bonuses are (and should be) given out to reward employees for exceptional performance. However, what if it is found that there was exceptional misconduct or misstatements made by the employee who received the bonus? Do you have any recourse? By having a clawback element in your company's bonus scheme, you are able to mitigate risk by recouping a portion of or all of the bonus.

There are two reasons for implementing a clawback element to your bonus scheme as a risk management strategy. First, a clawback element creates a disincentive for an employee to engage in any behavior that could be perceived as risky or harmful to the company. And second, if you focus the clawback properly, employees will come to understand not only on the potential punishment , but also how they can be engaged in reinforcing company processes and values in a way that benefits everyone involved.

We routinely talk about managing risk in the supply chain, but smart organizations manage risk in all areas of the company. Do you have a great example of HR risk management? Let us know in comments.

14 comments on “Manage Corporate Risk With Clawbacks

  1. t.alex
    November 9, 2013

    This might be more suitable for banks 🙂 Many times do I hear about bank salesmen get super huge bonus because they dared to take (uncalculated and jeopardizing) risks.

  2. Daniel
    November 11, 2013

    “if you focus the clawback properly, employees will come to understand not only on the potential punishment , but also how they can be engaged in reinforcing company processes and values in a way that benefits everyone involved.”

    Frank, there is no doubt that it can add certain values to the company. But as an employee, I won't prefer such clawbacks because, it can affect my annual appraisal and hence promotions or incentives.

  3. SP
    November 11, 2013

    well i also think clawback would not be very positive for a healthy organization. In some services company, where HR people are highly political, can misuse this feature and create huge damage. I have seen sometime HR guys going outof the way to take grudge against few higly technical guys.

  4. Daniel
    November 11, 2013

    “In some services company, where HR people are highly political, can misuse this feature and create huge damage. I have seen sometime HR guys going outof the way to take grudge against few higly technical guys.”

    SP, you are right. Internal politics and biasing in annual appraisal can spoil all good works and the working environments.

  5. Hailey Lynne McKeefry
    November 12, 2013

    @t.alex, I could see that as a good example, but it seems very appropos to the supply chain to. As an example, purchasing professionals who go with a risky vendor to show bigger savings. People are always a big risk–and if you can make poeple think twice, it's bound to help the organization, whatever kind of business.

  6. Hailey Lynne McKeefry
    November 12, 2013

    @SP, that's really interesting. Why do you think HR would have a particular bias against tech people? I could see sales or some other high profile (in terms of making money) part of the organization but this one is hard for me to imagine.

  7. Hailey Lynne McKeefry
    November 12, 2013

    @Rich, but once Scrooge was a nice guy, he wasn't Scrooge anymore. He was just Ebenezer. 🙂

  8. Hailey Lynne McKeefry
    November 12, 2013

    @Jacob, i think that this could be hard for employees, if it is appled capriciously. However, I would imagine that this clawback would be in the face of egregious misconduct not as a common thing. That way it would fall into the category of “shock and awe”. Certainly if it was applied for the slightest thing it would be bad for employee morale.

  9. itguyphil
    November 12, 2013

    High risk = high reward (if it works in your favor)

    It's a double-edged sword

  10. Daniel
    November 13, 2013

    “i think that this could be hard for employees, if it is applied capriciously.”

    Hailey, yes you are right. Nobody wants any grading, if it's not beneficial for them and in general most of the employees are against of including too many parameters and stinging measures for denying their benefits/perks

  11. t.alex
    November 14, 2013

    Hailey, that makes a lot of sense too. I saw people who took in big bonus because they save a lot of purchasing costs for the company. However, there are always hidden costs somewhere else that only shown up at latter stages.

  12. SP
    November 14, 2013

    @Hailey, I was talking with reference to Indian IT industry and especially small organizations where HR deals with engineers at many steps after inducting into the organization and they hardly route through respective managers. Mostly its influencing their performance appraisals, making the exits really ugly and so on…

  13. Hailey Lynne McKeefry
    November 16, 2013

    @SP, i suspect that there are huge differences depending on where you are in the world. Thanks for the reminder.

  14. Anand
    November 21, 2013

    Bonuses should be given with a set of company policies to satisfy. The true potential of an employee can be had when the employee is under limited pressure of completing a task to meet his bonus. This way one can ensure employees stay focused while delivering their best. These bonuses may not always be in the form of cash. “Do this properly and win a trip for two in the Bahamas for 5 days.” While this may not always be the case, but employees in search of bonus will always try to give the best task.

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