Employee benefits and executive compensation practice group chair Mike Melbinger, based in Winston & Strawn's Chicago office, was quoted in WSJ.com on May 24. The article, "An Employee Messes Up. Time to Unleash the Claw?," discusses the debate of clawing back compensation from traders and risk managers in light of the J.P. Morgan Chase & Co. recent trading loss.
According to the article, use of clawbacks is rare and often not disclosed; however, if J.P. Morgan does it right, it could craft a gold standard for any future use of clawback and set precedent for the rest of the industry.
On the side in favor of clawbacks as a way to hold people responsible if their bets eventually blow up, Mr. Melbinger stated, "It's a best practice and in the interest of shareholders to claw back some compensation if it turns out to have been paid under an expectation that turns out not to have been true. Before you get paid, let's see if the bets turned out to be good or bad."
As J.P. Morgan wields the claw, it will need to first prove that rules were broken and that this isn't an instance of 20-20 hindsight.
For more information on clawback provisions and other executive compensation related matters, visit Melbinger's Executive Compensation Blog.