Lateral candidates often talk about “my clawback” when they think about what it would cost to leave. Usually, what is holding them in place isn’t a clawback at all. It is deferred comp.
The difference matters, because hiring banks treat the two very differently. Only a handful of banks use clawbacks in a meaningful way. In our 2025 compensation survey, only about 10 to 12% of bankers reported having clawback provisions. Deferred comp, on the other hand, is everywhere, and it grows with seniority.
For a while this year, it looked like the clawback question might answer itself. New laws in California and New York were supposed to end most “stay-or-pay” arrangements. That is not how it has played out. Clawbacks are still legal, still being written, and in some ways harder to deal with than before. That is a big part of why banks that are recruiting remain gun-shy about them.
We thought the new laws would kill clawbacks. They didn’t.
When we wrote The Clawback Crackdown in February, the direction looked clear. California’s AB 692 was set to take effect on January 1, 2026. New York’s Trapped at Work Act had been signed in December 2025. The federal government had spent years attacking noncompetes. We, and much of the industry, read that as the beginning of the end for clawbacks: the era of unchecked stay-or-pay agreements was winding down.
Eight months later, clawbacks are very much alive. Here is what actually happened.
1. California hit pause for a full year
On September 30, 2026, Governor Newsom signed AB 1697. It made AB 692 inoperative for all of 2026. The ban now applies only to contracts entered into on or after January 1, 2027. AB 1697 also blocks liability for stay-or-pay agreements signed from January 1 through September 30, 2026. The legal commentary we reviewed does not clearly address agreements signed from October through December 2026.
In practice, clawbacks California employers wrote through September of this year are protected, and the new limits only bite on contracts signed from January 1, 2027. How agreements signed in the last three months of 2026 will be treated is an open question.
2. California carved out financial services
AB 1697 also added a new exception for recruiting and retention payments to agents and representatives of registered broker-dealers, investment advisers and insurance producers. This exception is much looser than the general rule:
- No requirement to offer the employee the option to defer the payment.
- No two-year cap on pro-ration.
- No limit to resignation or misconduct, so repayment could in principle be triggered in other situations too.
- Interest is allowed, up to the IRS applicable federal rate.
The conditions that remain are a standalone repayment agreement, payment on top of normal compensation, and at least five business days for the employee to consult a lawyer. Many investment bankers are licensed through a broker-dealer, so this exception could reach them. How far it reaches is something bank lawyers will be working through, but on its face it is a carve-out written for exactly the kind of firm that employs bankers.
3. Even California’s general rule still allows clawbacks
Outside the financial services exception, California still allows a repayable bonus if the employer follows the rules: a separate agreement from the offer letter, five business days for the employee to consult a lawyer, interest-free and pro-rated repayment, a retention period of no more than two years, the option to defer the payment until the end of that period, and repayment only if the employee chooses to leave or is fired for misconduct. AB 1697 also widened this exception so it covers current employees, not just new hires. A bank that follows the checklist can still claw back.
4. New York delayed its law and wrote in an exception for sign-ons
The Trapped at Work Act was signed on December 19, 2025, and was supposed to take effect immediately. Amendments signed on February 13, 2026 pushed it back a year. Most read the new effective date as December 19, 2026; some lawyers think it could be February 13, 2027. The amendments also narrowed the law from all “workers” to employees, and added an explicit exception: employers can still require repayment of a sign-on bonus, relocation assistance or another incentive that is not tied to specific job performance.
The limits on that exception matter. Repayment can’t be required if the employee is let go for any reason other than “misconduct,” or if the employer misrepresented the job. But “misconduct” isn’t defined, “not tied to specific job performance” isn’t defined, and it is unclear whether agreements signed before the effective date are covered at all.
5. New York’s enforcement is light
There is no private right of action. Employees can’t sue under the Act. Enforcement runs through the state Department of Labor, with fines of $1,000 to $1,500 per violation. Each employee asked to sign a prohibited agreement, and each attempt to enforce one, counts separately. For a bank, that is a modest penalty compared with the size of a typical banker’s sign-on.
6. The federal backstop is gone
The FTC’s 2024 rule banning most noncompetes was set aside by a Texas federal court in August 2024. On September 5, 2025, the FTC dismissed its appeals, ending the nationwide ban. The agency says it will pursue anticompetitive noncompetes case by case instead. There is no federal rule on stay-or-pay agreements in its place.
7. Clawbacks are gaining ground elsewhere
Outside the lateral-hiring context, clawbacks are not just surviving, they are being strengthened. Dodd-Frank-era rules requiring public companies to claw back executive pay after financial restatements remain mandatory. In March 2026, a bipartisan group of senators reintroduced the Failed Executives Clawback Act, which would require the FDIC to recover pay from executives of failed banks with $10 billion or more in assets. And on October 15, 2026, Switzerland’s top court upheld the government-ordered cuts to bonuses for about 1,000 senior Credit Suisse staff after the bank’s 2023 rescue.
What the laws don’t touch: deferred comp
Both state laws target agreements that make an employee repay money already paid. New York’s statute is silent on forfeiture of incentive comp and restricted stock. Deferred comp, the tool most banks rely on, sits largely outside the new rules.
The bottom line
Clawbacks didn’t die. They became narrower, more technical and less predictable. Whether a particular clawback is enforceable now depends on the state, the date it was signed, whether the employee is licensed through a broker-dealer, whether the agreement was drafted to the new checklists, and how undefined terms like “misconduct” get read. For a bank trying to hire someone who carries one, that is exactly the problem. It can’t easily tell what the candidate really owes. This is a general summary, not legal advice.
The distinction: money you never had vs. money you have to give back
Deferred comp is pay that has been awarded but not yet delivered. It is usually restricted stock or deferred cash that vests over time, most often on a three-year ratable schedule, a third each year on the grant anniversary. If you resign before it vests, you forfeit it. You never received it, so there is nothing to repay.
A clawback is the opposite. It applies to money you have already been paid. If you leave before a set date, usually two years, you owe some or all of it back to the bank in cash.
Both keep bankers in their seats. But from the point of view of a bank trying to hire someone, they could not be more different. Forfeiting deferred comp is a clean break. A clawback is a debt that follows the candidate out the door.
How much deferred comp bankers actually carry
Deferral rises with level. From our survey data:
- Associates 1-2: typically 14-20% of bonus deferred
- Associate 3 / VP 1: typically 21-25%, and 26-30% in some cases
- VP 2-3: highly variable, roughly 14-30% depending on bank and performance
- Director and above: often 31% or more, and 40-50% at some bulge-bracket banks
With three-year vesting, those layers stack. A VP or director who has been at a bank for a few years can have three overlapping tranches unvested at once. That is the real retention tool at most banks, and it is what a hiring bank expects to deal with.
Why recruiting banks prefer deferred comp
1. The buyout is a replacement award, not a check to a competitor. When a candidate forfeits deferred comp, the hiring bank typically replaces it with its own award at the new bank. That award vests over time, often on a schedule similar to the one the candidate gave up. In the UK, the PRA’s buy-out rules, in force since January 1, 2017, say a replacement award can’t pay more than the forfeited award or vest faster. The cost is spread over several years, and the money stays inside the new bank’s own pay structure. A clawback works the other way. The candidate owes cash to the old bank, now. If the hiring bank covers it, it is effectively writing a check that ends up with a competitor.
2. The replacement award keeps the new hire in place. Because it vests over time, the retention the old bank had moves with the candidate. A clawback buyout doesn’t do that on its own. As we wrote in our lateral market update, banks that cover a clawback typically set it up as a new sign-on with its own two-year clawback. The hiring bank ends up relying on the very tool it was just paying to get around.
3. Deferred comp is easy to value. Every tranche has a grant date, an amount and a vesting date, and a candidate can pull a vesting statement. Banks will not buy out speculative values. A clawback is harder to pin down: cliff or pro-rated, gross or net, and, after this year, possibly unenforceable depending on where and when it was signed.
4. Forfeiture is tax-clean. A clawback is not. Unvested stock that is forfeited is never taxed, because the banker never received it. The replacement award is taxed when it vests at the new bank, just as the original would have been. A clawback is the opposite, as the next section explains.
5. The law leaves deferral alone. As above, the new state laws are aimed at repayment, not forfeiture. Banks building pay for the long term are leaning on the tool under less legal pressure.
The tax problem with clawbacks, explained
This is the part of a clawback most bankers don’t understand until they are writing the check. The short version: a bank pays a bonus net of taxes, often asks for it back gross, and the tax system only partly undoes the original withholding. Here is how it works step by step. This is a general overview based on IRS guidance, not tax advice. Anyone facing a real repayment should talk to a tax adviser before paying.
Step 1: The bonus is taxed when it is paid
A sign-on or retention payment is wages. When the bank pays it, it withholds federal income tax, state and local income tax, and FICA (Social Security and Medicare). The banker receives the net amount, and the full gross amount goes on that year’s W-2.
Step 2: The clawback is usually written in gross dollars
Most repayment agreements say the banker owes back the bonus, meaning the gross amount, not what actually landed in their account. That gap is where the trouble starts.
Step 3: If you repay in the same calendar year, it can be unwound cleanly
If the repayment happens in the same year the bonus was paid, the bank can generally treat it as if it never happened. The banker repays only the net amount. The bank recovers the withholding it paid over by adjusting its payroll filings, and the year-end W-2 leaves the bonus out entirely. No extra tax, no special forms on the banker’s return. If a bank demands the gross amount in the same year, the banker should ask why, and how the withholding will be credited back.
Step 4: If you repay in a later year, the rules change
Most clawbacks are triggered in a later year, and here the bank’s ability to fix things is limited:
- The bank can recover Social Security and Medicare tax. It files an amended payroll return (Form 941-X) to recover the FICA it withheld, for up to three prior years.
- But the bank must give the banker’s share back. To claim a refund of the employee’s share of FICA, the bank has to certify that it has repaid or reimbursed the employee, or that it has the employee’s written consent to file the claim, and for prior years, a written statement that the employee hasn’t claimed and won’t claim the refund themselves. In other words, if you repaid the gross amount including FICA, that FICA should come back to you.
- The bank cannot recover the income tax it withheld. That tax was credited to the banker on their return for the year of payment. The employer has no way to adjust it.
- The bank issues a corrected W-2 (Form W-2c), but only for Social Security and Medicare. The W-2c corrects the Social Security and Medicare wages and tax for the earlier year, and the bank files it with the Social Security Administration. Box 1 wages are not changed. IRS guidance is explicit: do not correct box 1 for the amount repaid, because the banker had the use of the money that year.
- The banker can’t amend the earlier return to fix it. The income stays taxable in the year it was paid. Relief comes on the return for the year of repayment.
So in a later-year repayment, the banker typically ends up repaying the net amount plus the income tax that was withheld, and the bank recovers the FICA. One employment law firm’s example, scaled up: on a $100,000 bonus where $69,000 was paid out after $7,650 of FICA and $23,350 of income tax was withheld, a same-year repayment would be $69,000. A next-year repayment would be $92,350. The banker is then out $23,350 of income tax until they recover it on their own return. The withholding split here is illustrative. Many bankers are already over the Social Security wage cap by the time a bonus is paid, in which case the FICA withheld is mostly Medicare and there is less for the bank to recover.
Step 5: Getting the income tax back: the claim-of-right rule
For the size of clawbacks bankers deal with, the rule that matters is Section 1341 of the tax code, the “claim of right” rule. It covers repayments of income that was taxed in an earlier year, which describes almost any banker clawback. (Small repayments are a different story: since the One Big Beautiful Bill Act, signed July 4, 2025, made the suspension of miscellaneous itemized deductions permanent, they generally get no deduction at all.)
Under Section 1341, the banker calculates their tax two ways for the year they repay and uses whichever is lower:
- Method 1: a deduction. Deduct the repayment as an itemized deduction in the year of repayment.
- Method 2: a credit. Skip the deduction. Instead, work out how much less tax would have been paid in the earlier year if the bonus had never been included, and take that amount as a credit. If the credit is larger than the current-year tax, the excess can be refunded.
Method 2 tends to help bankers whose bonus was taxed at a high rate, or who repay in a year when their income is lower, for example after a gap between jobs. Either way, the relief only arrives when the banker files the return for the year of repayment, often more than a year after writing the check. Large Section 1341 claims tend to draw IRS attention, so keep the repayment agreement, proof of payment and the W-2c together.
Step 6: The smaller pieces
- Additional Medicare Tax. The bank can’t adjust it for a prior year. If the banker paid it on the bonus, they recover it by amending that year’s return.
- State and local tax. Employers can generally only recover state withholding when the repayment happens in the same year, and states treat repaid wages differently. That matters for bankers who have moved between states.
Where the double tax comes from
Put it together and you can see why bankers feel taxed twice. They paid income tax on a bonus, then handed back more than they received, and they only get that tax back later through Section 1341, sometimes only in part. If a new bank covers the clawback, that payment is new taxable wages too. So in a single move, the banker can be taxed on the buyout from the new bank while repaying a bonus to the old bank that they were already taxed on. Forfeited deferred comp has none of these problems, which is one more reason hiring banks prefer it.
What to ask your old bank before you repay anything
- Is the amount you are asking for gross or net, and how did you calculate it?
- Which tax year will this repayment be treated in?
- Will you recover the Social Security and Medicare tax, and will you refund my share to me?
- When will you issue my Form W-2c, and will it be filed with the Social Security Administration?
- Can the repayment be netted against any final pay you still owe me?
What each one says about the candidate
Hiring banks also read the two differently. A large deferred comp balance is usually a good sign. Banks don’t spend retention dollars on people they are happy to lose. As we put it in Show Me the Money (That You Can’t Touch), your deferred comp structure tells a hiring bank what your current bank really thought of you.
A live clawback says something else. It usually means the candidate arrived at their current bank recently, often with a sign-on. That isn’t a red flag on its own, but the hiring bank will want to know why the candidate is moving again so soon, and whether it will be next.
What it means by level
Associates. Deferred balances are modest, so a replacement award is a small, routine ask. Clawbacks at this level, where they exist, are usually tied to a sign-on from a recent move.
VPs and directors. This is where stacked tranches add up and buyout negotiations get real. A candidate with documented deferred comp is a cleaner hire than one who also has a clawback in the mix.
MDs. Deferral is heaviest here, and clawbacks at the MD level, where they exist, are usually tied to deferred comp rather than a sign-on. The question for the hiring bank is how much of the unvested balance to replace, on what schedule, and whether the candidate’s book justifies it.
What candidates should do
- Know which one you have. Read your award agreements and offer letter. Unvested stock you’d forfeit is not the same as cash you’d have to repay.
- Pull your vesting schedule. List every unvested tranche with its grant date, amount and vesting date. That is what the hiring bank will price.
- If you do have a clawback, know the real number. Cliff or pro-rated, gross or net, the end date, the state and date it was signed, and which tax year a repayment would fall in.
- Don’t assume the new laws wiped it out. Depending on when and where it was signed, and whether you are licensed through a broker-dealer, it may be fully enforceable.
- Tell your recruiter early. Deferred comp can be priced into an offer from the start. A clawback that surfaces late can stall or sink a process.
- Time it around vest dates and tax years. Moving just after a tranche vests leaves less for the hiring bank to replace. If you do have to repay a clawback, doing it in the same calendar year you were paid is usually far cheaper.
Banks are still gun-shy on clawbacks because the new laws didn’t make them go away. They made them harder to read. A clawback turns a hire into a legal and tax puzzle. Deferred comp turns it into a pricing problem, and pricing is something banks do every day. Candidates who know which one they carry, and come to the table with the numbers, give the hiring bank an easy reason to say yes.
Related reading
- Show Me the Money (That You Can’t Touch): How Deferred Comp Separates Real Performers from Posers
- The Clawback Crackdown: What California and New York’s New Laws Mean for Investment Bankers
- Investment Banking Lateral Market Update: Offer Terms, Compensation Structures, and What It Actually Takes to Get Hired Right Now
Sources
- Prospect Rock Partners, “Show Me the Money (That You Can’t Touch)” (2025 survey data on deferral rates and clawbacks; Dodd-Frank clawbacks): prospectrockpartners.com
- Prospect Rock Partners, “Investment Banking Lateral Market Update”: prospectrockpartners.com
- Prospect Rock Partners, “The Clawback Crackdown” (Feb. 10, 2026): prospectrockpartners.com
- Mayer Brown, “California Delays Stay-or-Pay Law to January 1, 2027 and Expands Key Exceptions: An Update on AB 1697” (Oct. 2, 2026): mayerbrown.com
- Mintz, “Not So Fast: California Rewrites the Rules on Stay-or-Pay” (Oct. 6, 2026): mintz.com
- Ogletree, “New York Amends the Trapped at Work Act: What Changed and What Remains Unclear”: ogletree.com
- Hughes Hubbard & Reed, “FTC Abandons Nationwide Noncompete Ban and Reverts to Targeted Enforcement” (Sept. 2025): hugheshubbard.com
- Consumer Finance Monitor, “Bipartisan group of Senators re-introduces banker ‘clawback’ legislation” (Mar. 26, 2026): consumerfinancemonitor.com
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- CMS, “Bonus buy-outs and other banking remuneration updates” (PRA buy-out rules from Jan. 1, 2017): cms.law
- Paasa, “What happens to RSUs when you leave a company”: paasa.com
- IRS Chief Counsel Advice 201312030 (released Mar. 22, 2013), on prior-year wage repayments, Form W-2c and box 1: irs.gov
- Dickinson Bradshaw, “Employee Repayment of Compensation – Update” (repayment example): dickinsonbradshaw.com
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- Teach Me Personal Finance, “IRS Form 941-X Instructions” (employee consent certifications): teachmepersonalfinance.com
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