Finance
Clawback
A contractual provision allowing an organization to reclaim previously distributed money under certain conditions, such as fraud, misconduct, or failure to meet performance targets.
Biological Context
Nature has clawback mechanisms. Plants can reabsorb nutrients from leaves before shedding them. Colonial organisms can redirect resources away from underperforming units. These mechanisms prevent permanent loss of invested resources when circumstances change.
Business Application
Clawbacks align incentives over longer time horizons. Executive compensation clawbacks discourage short-term thinking that damages long-term value. Without clawbacks, agents may take excessive risks knowing they keep gains but don't bear losses.