How About a 'Clawback' of Public Sector Pay?

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In recent years, a growing wave of economic populism has heralded the clawback as a useful check on the misdeeds of corporate managers. Generally, a clawback attempts to regain previously conferred monies following a triggering event, usually involving some change in circumstance. In its simplest form, the clawback is a mechanism to recoup compensation paid to an executive if it turns out that things were not quite as rosy as they first appeared.

Clawback provisions were included in both the Sarbanes-Oxley Act following the collapse of Enron and the American Recovery and Reinvestment Act ("ARRA") passed in response to the financial crisis. The provision of the ARRA provides "for the recovery . . . of any bonus, retention award, or incentive compensation paid to a senior executive officer . . . based on [financial results] that are later found to be materially inaccurate." As clawbacks have become more common, proponents have discovered that wealthy businessmen make great hobgoblins.

The AIG debacle is instructive. Following the insurer's near bankruptcy and subsequent government bailout, Congress pursued a retroactive marginal tax rate of ninety percent on the performance-based bonuses that AIG had paid to employees shortly before its troubles. At the time, those looking to undo the contractually required payments expressed the view that bonuses should not be decoupled from company performance - particularly when taxpayer money was involved!

I must confess that I do not generally support clawbacks. They suffer from latent subjectivity and are frustrating to both the expectation and enforceability of contracts. In fact, as clawbacks gain momentum, employees should worry that a good portion of their earnings are subject to the fate of the stuffed animal in the arcade game-unable to relax in the shadow of big brother's omnipresent claw.

Against all this talk of fairness, however, the clawback caucus has been remarkably quiet about applying the same ex post facto accountability to the public sector. And, in light of the recent abuses uncovered at several government agencies, it seems high time to consider the case for recouping bonuses paid to misbehaving government employees on par with their private sector counterparts. By way of example, last year the VA awarded more than $380,000 in bonuses to top executives at VA hospitals where investigators are examining claims of manipulated or falsified appointment records and excessive delays in patient care. The IRS too awarded tens of thousands of dollars to officials involved in the Service's questionable actions against tax-exempt applicants. This past week, the Commerce Department's Inspector General found that $5 million was paid to paralegals at the U.S. Patent and Trademark Office who "seemed content to have idle time while collecting full salaries and benefits." Perhaps someone in government should repay a bonus for providing advice that the 2012 recess appointments to the National Labor Relations Board were appropriate. Once that advice proved mistaken, roughly 100 cases heard by the Board and a whole host of other administrative, personnel and procurement actions were invalidated at great cost.

At the end of the day, it is difficult to imagine why bonuses paid to government workers should be decoupled from the government's performance. After all, the efficacy of government already suffers in the absence of the profit motive that constrains private business. And, if private sector employees are held accountable to their shareholders, public sector employees should also be held to account - particularly when taxpayer money is involved!


Michael Macchiarola is a Managing Director at Equinox Financial Solutions and an Adjust Professor at St. Francis College.  

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