Wells Fargo was fined $185 million after employees created unauthorized accounts for customers in an effort to meet sales targets. This week, company CEO John Stumpf will appear before the Senate Banking Committee. (Joe Raedle/Getty Images)

Anyone paying attention to Tuesday's Senate Banking Committee hearing over Wells Fargo's sales tactics is likely to hear a lot about a single word: "Clawbacks."

It's the practice of doing just what it sounds like: Taking money back from an executive for compensation they've already been paid for things such as misconduct, gross negligence or "material" errors. And though the idea of a clawback provision has been around since at least 2002, it remains a rare practice that hasn't gotten much high-profile attention from the general public.

That could change Tuesday when Wells Fargo CEO John Stumpf faces a panel of senators looking for answers about the pay certain executives received over the same period that his bank fired more than 5,000 employees for creating two million accounts that may have not have been authorized by customers. "This is the first visible example I can think of with clawbacks being talked about in a hearing," said Alan Johnson, managing director of pay consultant Johnson Associates. Former Federal Deposit Insurance Corp. Chair Sheila Bair even told CNBC recently that "if you're going to use clawbacks, this would be the situation."

In a sure sign the issue will be in the spotlight on Tuesday, five Democratic members of the Senate Banking Committee signed a letter asking the bank about its clawback policies, as well as other issues. In particular, it asked whether the bank would claw back "any or all parts" of the incentive awards received by Wells Fargo executive Carrie Tolstedt, who oversaw the retail banking division where the phony accounts were created, as well as other executives.

According to the executive compensation research firm Equilar, the value of Tolstedt's retirement package and vested equity compensation during her career at Wells Fargo was valued at $94 million last Monday. A Bloomberg analysis last week suggested the bank's clawback policy permits it to recoup $17 million in unvested shares, or shares to which she does not yet have access.

[Sen. Elizabeth Warren says Wells Fargo executives should give back bonuses]

Corporate governance experts and executive compensation consultants say that under Wells Fargo's own clawback provisions, it appears the bank could make a case for taking back executives' pay. For instance, according to company filings, one thing that could trigger the bank to recoup executive awards is "misconduct which has or might reasonably be expected to have reputational harm to the company." Says Johnson: "Sure, they can apply [the provisions]. The question is, should they? To do that you need to have the facts. It takes a fair amount of teasing out what really happened."

Divesh Sharma, a professor of accounting at Kennesaw State University who studies clawbacks, says that if the bank decides to claw back any executive pay, "they'll be opening themselves up to potential litigation. Clawing back is interpreted as a sign of something going wrong."

That's one reason it's still quite rare for companies to claw back executive pay. Jesse Fried, a professor at Harvard Law School who studies corporate governance, says "it's still extremely rare to hear of a public company using its own voluntarily adopted clawback provision" to go after their own executive's pay. Even actions from the SEC, which under the Sarbanes-Oxley Act added the ability to go after the pay of a CEO or chief financial officer of a company that presided over misconduct and made accounting restatements, have been few in number, Sharma said.

If the bank does decide to take the risk, Sharma says, the next question is how much they would claw back. The bank could say "okay, to placate everybody -- the media, the senators -- and as a sign of good faith with shareholders, we will claw back some portion," Sharma says. "But I don’t think they’ll disclose the amount." (A Wells Fargo spokesman declined to comment on the matter, but pointed to an interview with CEO John Stumpf by CNBC's Jim Cramer, who asked him about clawbacks. "To the extent that's a consideration, we have a board process," Stumpf said.)

Politics is one concern Johnson has about clawbacks, which under proposed rules from the Dodd-Frank Act that have yet to take effect, would require public companies to "develop and enforce" policies that recoup executive pay in the event of an accounting restatement, or risk being de-listed from securities exchanges. Johnson fears clawbacks could become politically driven and, while well-intentioned, could have unexpected consequences. "If you make the penalties strenuous enough, when honest mistakes happen, people are going to try to cover them up," he said.

In addition, large national banks could be subject to other proposed rules set by government agencies that would set further clawback provisions, giving the country's largest banks up to seven years to recoup executive bonuses and having them make bonus payments over a period of four years, rather than handing it all over at one time.

Large banks, of course, have been fighting the rule, but the current scandal isn't likely to help their case, Johnson says. As he sees it, "Whatever chance they had of changing them declined." 

Read also:

Wells Fargo's terrible, horrible, no-good, very bad week

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