Navigating Clawback Provisions on RSUs: Key Considerations for Companies and Startups‍

Casey Fenton

|

November 24, 2023

Imagine being a top executive at Wells Fargo, banking millions in bonuses and Restricted Stock Units (RSUs), only to wake up one day to a headline-grabbing scandal and see a large chunk of your hard-earned compensation being clawed back. That's precisely what happened in the wake of the Wells Fargo account fraud scandal, where clawback provisions were enforced to reclaim millions in executive bonuses and stock awards.

In a crisis situation like Wells Fargo's, clawback provisions served as a financial and ethical safeguard. They not only provided a means for the company to recover substantial amounts of money but also served as a deterrent for misconduct. By taking back bonuses and RSUs, Wells Fargo sent a message—both internally and externally—about the level of accountability expected within the company. This high-profile case made many startups and established companies alike reevaluate their own compensation structures, illustrating the imperative for clear, enforceable clawback provisions to protect both company assets and reputation.

What Are Clawback Provisions?

Clawback provisions are contractual clauses that allow you, the employer, to reclaim compensation under specific circumstances. These conditions often relate to violations of company policy or the law, and sometimes include performance metrics that weren't met.

In the context of RSUs, a clawback provision would empower you to take back shares or their equivalent value from employees. These provisions are your safety net, ensuring that your resources are not misused or unnecessarily distributed.

Who Creates Clawback Provisions

The responsibility for creating clawback provisions usually falls upon your legal team, often in consultation with human resources and financial advisors. In startups, where a legal team might be a luxury, founders or key stakeholders can draft these provisions with the help of external legal consultants.

You're not in this alone, though. Multiple parties need to be involved to ensure the clawback provisions are fair, legal, and beneficial to both the company and its employees.

Significance of Clawback Provisions on RSUs

You might wonder, "Why fuss about clawback provisions when you already have a robust RSU plan in place?" The answer is essential for the financial stability and ethical integrity of your company. Here's why:

1. Alignment with Long-Term Objectives

RSUs are generally given to employees as a long-term incentive. Clawback provisions ensure that these incentives align with the company's long-term objectives. It's not just about rewarding tenure; it's about rewarding beneficial conduct over that tenure.

2. Enhancing Corporate Governance

Incorporating clawback provisions is a strong governance move. It sends a clear message to shareholders, regulators, and employees that you take financial responsibility and ethical conduct seriously. For publicly traded companies, this can translate into more investor confidence, possibly affecting your stock value positively.

3. Talent Management Strategy

While it may seem counterintuitive, having a well-defined clawback provision can actually aid in talent management. Clear policies help set employee expectations from the onset, so there's no misunderstanding down the line. Talented professionals appreciate clarity, and clawbacks offer exactly that—a detailed framework within which they can operate.

4. Psychological Influence

Clawback provisions have a subtle psychological influence on behavior. When people know there are concrete financial repercussions tied to certain actions or inactions, they are more likely to act in the company's best interest.

5. Legal Leverage

Lastly, in cases of outright fraud, malfeasance, or severe underperformance, clawback provisions give you the legal authority to reclaim compensation. They serve as a financial disincentive for reckless or harmful actions that could otherwise have serious ramifications for your business.

Types of Clawback Provisions

When it comes to clawback provisions, there's no one-size-fits-all approach. Depending on your company’s goals, risk profile, and the nature of your workforce, you might opt for one or a blend of the following types:

1. For Cause

When you opt for a "For Cause" clawback provision, you specify that RSUs can be reclaimed if an employee is terminated for a serious violation of company policies or legal statutes. This type is often used to combat fraudulent activity or ethical misconduct. The definition of "cause" should be meticulously crafted to include scenarios most pertinent to your industry and corporate culture.

2. Performance-Based

These provisions are intricately linked to KPIs (Key Performance Indicators). For instance, you might stipulate that an executive must achieve a particular revenue growth rate over a three-year period. Failing to meet these metrics can trigger the clawback. This type incentivizes not just staying with the company but actively contributing to its success.

3. Time-Based

Time-based clawbacks usually concern employee retention. If an employee leaves the company within a particular timeframe—say, two years from the grant date of the RSUs—you can reclaim those units. This type of provision is less about performance and more about ensuring long-term commitment from key talent.

4. Regulatory-Triggered

Regulatory changes can dramatically impact a company's business model. A regulatory-triggered clawback activates when new laws or regulations impose unforeseen costs or responsibilities on your company. This can be particularly useful in industries that are highly regulated, such as pharmaceuticals and finance.

5. Good Leaver/Bad Leaver

This specific approach categorizes the circumstances under which an employee leaves the company as either "good" or "bad," as predefined in the agreement. For instance, retiring or leaving for medical reasons could be classified as "good," while getting fired for misconduct would be "bad." The terms of the clawback differ based on this categorization, offering more flexibility for both parties.

6. Multi-trigger Provisions

Some companies opt for a multi-trigger approach, incorporating elements of various types into a single, more comprehensive clawback provision. This allows you to tailor your approach, ensuring it aligns closely with both the company's and the employee's best interests.

Communicating the Clawback Provisions Effectively

You've worked hard to draft fair, protective clawback provisions. But if these rules are hidden in the fine print, you run the risk of them being overlooked or misunderstood. This is why communication is critical. Here's how you can make sure your team is fully informed:

Written Policy

The first line of defense is a well-crafted written policy. Include detailed clawback provisions in all relevant documents, such as the RSU agreement, the employee handbook, and any other policy documents. Make sure these are easily accessible, either through a company intranet or as a physical copy that employees can refer to.

Orientation Sessions

Don't assume that new employees will pore over every detail of their contracts. Use orientation and onboarding sessions to walk them through the finer points of their RSU package, including the clawback provisions. It may help to create visual aids or infographics that simplify these complex terms into easy-to-understand language.

Periodic Briefings

Changes in laws or company policies might necessitate amendments to your clawback provisions. Whenever there's a significant change, hold a briefing session. You might think an email will suffice, but the gravity of the topic often merits a more direct form of communication.

FAQs and Glossaries

Complex legal terms can be confusing. Create a Frequently Asked Questions (FAQ) document or a glossary that explains these terms in simple language. Distribute it among employees and make it accessible year-round.

One-on-One Consultations

Sometimes employees may have personal or specific queries they're not comfortable asking in a public forum. Offering the option for one-on-one consultations with HR or legal experts can go a long way in ensuring everyone understands what they're signing up for.

Transparency Through Tech

Leverage technology to make these provisions more transparent. For instance, you can use your company’s internal app to host an interactive Q&A session or create a dedicated portal where employees can log in to see the specifics of their RSU and associated clawback provisions.

Challenges of Clawback Provisions

While clawback provisions offer undeniable benefits, their implementation is not without hurdles. By being aware of these challenges, you can better prepare your company for any potential pitfalls:

1. Legal Complexity

Clawback provisions often operate within a complex legal landscape that may vary significantly between jurisdictions. This complexity can make drafting and enforcing these provisions a challenging task. You'll likely need to consult experts who are well-versed in securities law and employment law to navigate this complexity effectively.

2. Employee Relations

The idea of having to give back earned RSUs can be a psychological deterrent for some employees. It might make them think twice about their commitment to your company or cause stress and anxiety, which can, in turn, affect productivity and loyalty.

3. Administrative Burden

Implementing and maintaining clawback provisions can be administratively cumbersome. Ensuring compliance, monitoring triggering events, and actually reclaiming stock units require dedicated resources. Small startups without extensive HR or legal departments may find this especially challenging.

4. Unclear Metrics

Performance-based clawback provisions that rely on KPIs must have those indicators clearly defined. Poorly defined or overly complex performance metrics can create confusion and may even open the door for legal disputes down the line.

5. Timing Concerns

For performance-based and time-based clawbacks, when do you assess whether the conditions have been met or violated? Deciding the timing can be a challenging task because it can affect both your financial planning and your relationship with the employee in question.

6. Market Perception

For publicly traded companies, the announcement of a clawback provision could have mixed reactions in the market. While some investors may appreciate the strong governance, others may see it as an admission that you expect things to go wrong, affecting investor confidence.

How to Draft Effective Clawback Provision Policies

  • Consult Experts: Bring in legal and financial advisors who understand both your industry and the complexities of RSUs and clawbacks.

  • Be Specific: Clearly define the triggering events for the clawback provision. Ambiguity is your enemy here.

  • Balance: Make sure your clawback provisions are fair and reasonable. They should protect the company without becoming punitive towards the employees.

  • Review and Revise: Constantly update your clawback policies to align with new laws, regulations, or company objectives.

  • Benchmark: Look at what your competitors or industry peers are doing. Not to copy them, but to understand the standards and expectations in your industry.

  • Get Employee Input: If feasible, involve employees in the discussion. This creates a sense of fairness and might even give you valuable insights.

Protecting Your Company’s Interests

Your clawback provisions are as much about protecting your company as they are about being fair to your employees. They should act as safeguards, not as punitive measures. So, be diligent, consult experts, and communicate effectively to navigate the tricky waters of clawback provisions on RSUs. By doing so, you ensure that your RSU policies are robust, fair, and aligned with your company's long-term goals.

Want to know more about RSUs and the complex legal scenarios you might run into? Feel free to browse Upstock’s learning materials here or book a demo to see RSUs in action.

Equity should be easy to understand

Figuring out equity offers can leave you feeling demotivated and paralyzed. Upstock makes equity motivating, inspiring, easy to deploy.

Learn More
ABOUT THE AUTHOR

Casey Fenton

Founder, Upstock & Couchsurfing, AI and Equity Innovator

Casey Fenton, the founder of Upstock & Couchsurfing and an AI and equity innovator, has revolutionized how we perceive and implement equity in the workplace. His foresight in creating platforms that not only connect people but also align their interests towards communal and corporate prosperity has established him as a pivotal figure in technology and community building. Casey speaks worldwide on topics including ownership mindset, worker equity, With Upstock and Couchsurfing, he has demonstrated an unparalleled expertise in harnessing technology for the betterment of community interaction and organizational benefits.

Previous: Mistakes to Avoid When Selling RSUs: A Guide for Employees‍ Next: Navigating Equity Compensation in a Diverse Creator Economy‍