Clawback

Clawbacks are the worst when you're a sales rep.

I've had commissions clawed back before. It was awful.

If you're not familiar with the term "clawback" or "sales clawback" and how it pertains to sales compensation, in this article I will walk you through:

• What is a clawback?
• Setting a sales clawback policy
• Sales clawback examples

What is a clawback?

A clawback is the recovery (i.e. taking back) of any compensation already given to an employee.

It's mostly to protect a company for when sales reps do bad deals with customers that don't pay their bill.

Clawbacks can also be implemented based on severe misconduct that negatively affects the company or its image.

It’s effectively a disciplinary action. A simple financial mechanism to recoup losses that are likely to occur in the ordinary course of business.

Clawback policies are most commonly found in incentive-based pay compensation plans, such as sales commissions or performance bonuses.

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Setting a sales clawback policy

In sales rep employment contracts, the clawback policy should be officially outlined in a clawback clause (or clawback provision).

In your policy, it should be made clear that clawbacks can be applied for several reasons, including:

• When a closed sale falls through within a set amount of time. For example, if a customer requests a refund or fails to pay up within three months, the sales rep can be hit with a clawback, voiding their commission on the sale. We have a 90 day clawback term for our B2B SaaS sales team. If the customer doesn't pay within 90 days, the sales rep gets their commission taken back (this rarely ever happens).
• When a rep leaves the company within a set time period, they may lose certain incentives they were offered when being recruited, such as a sign-on bonus.
• When a sales rep fails to meet certain performance objectives.
• When a sales rep is found guilty of misconduct (e.g. dishonestly promoting a product).
  

These clawback provisions must be present upfront in your Sales Compensation Plan or other contract agreement in order to be considered legal or otherwise valid. 

See the Sales Compensation Plan Template for help with creating or improving your own, based on how we structured ours at a venture-backed B2B SaaS company.

Sales clawback examples

Clawback for a closed deal that fell through: Let’s say a rep has recently closed a deal but the customer hasn’t yet paid. If the company fails to collect the payment for longer than three months (90 days), then the full commission on the deal must be paid back to the business by the rep or deducted from their next commission check.

Clawback for a sign-on bonus: If a rep is offered a sign-on bonus of X amount for their first year, but they leave the company before the first year is up, then their sign-on bonus can be subject to a full clawback.

Clawback for misconduct: If a rep is found to have been over-selling or falsely promoting a product, leading to dissatisfied or lost customers, then a clawback can be applied to the relevant past commissions in proportion to the severity of the misconduct.

The actual specifics of your clawback provisions for any given scenario will naturally need some thought on your part, given what makes the most sense for your company.

Now you at least know how we handle our clawbacks. I encourage you to always do the same when hiring people in performance based pay roles.