A divorce decree divides what the spouses own on the day it is signed. A clawback can take some of it back later. When an executive’s bonus or equity is divided in a Texas divorce and the employer later recovers that pay, someone has to absorb the loss. Unless the decree says who, it is usually the executive.

This guide explains the clawback rules that apply to public company executives, how they collide with a Texas property division, and the decree terms that executives and their spouses in Houston, the Heights, Sugar Land and Missouri City should negotiate.

Two kinds of clawbacks

Mandatory clawbacks for listed companies. Under SEC Rule 10D-1, adopted in October 2022 to implement section 954 of the Dodd-Frank Act, companies listed on U.S. exchanges must adopt and enforce a written clawback policy. The NYSE and Nasdaq listing standards took effect October 2, 2023, and companies had until December 1, 2023 to adopt compliant policies. Key features:

• Applies to current and former executive officers
• Covers incentive based compensation received during the three completed fiscal years before the company is required to prepare an accounting restatement
• Recovery is required regardless of fault
• The amount is calculated on a pre-tax basis
• The company may not indemnify or insure the executive against the loss

Contractual clawbacks. Many employment agreements and equity plans also allow recovery for misconduct, breach of a noncompete or confidentiality covenant, or violation of company policy. These vary widely, so the documents control.

Why clawbacks are a divorce problem

Suppose a $1 million bonus earned during the marriage is community property, and the decree awards half of it to the non-executive spouse. Two years later, a restatement triggers recovery of the full $1 million. The company’s claim runs against the executive. The decree, signed before the clawback, likely gave the former spouse their share outright. The executive repays $1 million, on a pre-tax basis, while having kept only half.

A Texas court generally cannot later amend the property division (Family Code section 9.007). Any sharing of clawback risk has to be agreed or ordered in the original decree.

What to review before settling

• The company’s clawback policy, which public companies file as an exhibit to their annual report
• Clawback terms in the executive’s employment agreement and each equity award
• Which awards being divided are “incentive based” (tied to financial reporting measures such as revenue, earnings or total shareholder return) and which are purely time based
• Whether any restatement, investigation or misconduct allegation is pending

Performance awards are especially exposed because they are often tied to financial measures. See our guide to RSUs and PSUs in a Texas divorce.

Ways to allocate the risk

1. Shared risk clause. If a clawback occurs within a set period, the former spouse reimburses a proportionate share of what they received from the affected compensation, with a defined calculation and deadline.
2. Asset selection. Satisfy the non-executive spouse’s share with assets that cannot be clawed back, such as real estate, retirement accounts or cash, and leave potentially recoverable compensation with the executive.
3. Holdback or escrow. Hold back part of the non-executive spouse’s share of recent incentive pay until the lookback period passes.
4. Price the risk. The executive keeps the risk but receives a modest adjustment elsewhere in the division to reflect it.

The right choice depends on the size of the exposure, the company’s circumstances and the other assets available. The language must be precise: what counts as a clawback, how the former spouse’s share is computed, and whether amounts are measured before or after tax.

Clawbacks and other executive pay issues

Clawback risk interacts with golden parachute payments, deferred compensation and stock options, and with tax planning for the year of repayment. Our executive compensation guide brings these together.

Speak with a Houston divorce lawyer for executives

Chidi Anunobi is Board Certified by the Texas Board of Legal Specialization and holds an M.B.A. from Carnegie Mellon University. Our firm also practices business litigation, which is useful when a divorce involves employment agreements, restrictive covenants and corporate policies.

From our office at 1415 North Loop West, we represent clients across the Houston Heights, River Oaks, Missouri City, Sugar Land, Pearland, Katy, Fulshear, The Woodlands and Cypress, throughout Harris, Fort Bend and Montgomery Counties. Call 832-538-0833 or contact us for a confidential consultation.

Frequently asked questions

What is a clawback in a divorce context? An employer’s right to recover pay already received. If that pay was divided in the divorce, the decree should say who bears the loss.

Does the SEC clawback rule require fault? No. Rule 10D-1 requires recovery of erroneously awarded incentive pay after a restatement regardless of fault.

Can the company indemnify the executive? Not for amounts recovered under a Rule 10D-1 policy.

Can a Texas court change the division after a clawback? Generally no. Family Code section 9.007 bars amending the substantive division, so risk sharing must be in the original decree.

This article is general information, not legal advice.