Clawbacks are a topic that creates division in just about any company. Finance teams love them because they protect the business from taking a loss. Sales reps hate them. A clawback happens when a company takes back commission money that was already paid out to a sales rep. This happens when a customer cancels their contract, returns a product or fails to pay their invoice. Sales teams expect to keep what they’ve earned. But the business needs to protect itself from paying out commissions on revenue that never actually came through.
Back in 2005, less than 3% of the Fortune 500 businesses used clawbacks as part of their compensation structure. Fast forward to 2010, and the number shot to 82% – it’s a massive change in just 5 years, and it didn’t happen by accident. The sales models evolved a lot during that time period, and businesses had to adapt their compensation plans to line up with the new reality. Subscription-based businesses became much more common, which meant customers could cancel whenever they wanted to. Revenue recognition changed, too – instead of recognizing the revenue all at once when a customer signs a contract, businesses started spreading it out over the course of months or years to line up with the service delivery.
For most businesses, the question isn’t if they should use clawbacks – it’s how to structure them in a way that protects the business without killing morale or creating legal problems. A poorly designed clawback policy is one of the fastest ways to lose your top sales performers. Your top performers always have other options, and if they worry that their earnings could disappear, they’ll jump ship to a competitor.
Let’s talk about how to handle clawbacks in your compensation plan!
Events That Trigger Sales Clawbacks
One of the first big decisions for any company that wants to add clawbacks to its compensation plan is figuring out which events should actually trigger one. The most common trigger by far is when a customer doesn’t pay their invoice. That makes total sense because the company never actually received the money that was meant to fund the commission in the first place.
Contract cancellations work very much the same way, and it’s another common reason clawbacks get triggered. If a customer signs up but then cancels within a set window of time, the commission from that sale can get pulled back. Plenty of software businesses set this at around 90 days. The reasoning here is pretty obvious – if a customer cancels that fast, the deal probably wasn’t as strong as it looked. Chargebacks and product returns are also common clawback triggers. But how much this matters depends on your industry. Businesses that sell physical equipment will usually include clawback terms for returns in the first 30 or 60 days after they buy it. Service businesses don’t have to worry about this since there’s nothing physical to send back.
Every business model needs its own set of triggers, and the ones that work well for your company probably won’t be the right fit for another company. A subscription software company faces very different issues compared to a manufacturer. The software side tends to worry quite a bit about early cancellations and customer churn. Manufacturers face different problems – mainly product returns and installation failures.
You want to match your clawback triggers to whatever issues you face in your business. Deals fall apart at fairly predictable points across most industries and sales cycles, and these are the points where you can get the most protection from a clawback policy. But you also need to be fair to your sales team and only trigger these clawbacks when something has actually gone wrong with the deal.
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How to Make Clawback Clauses Hold Up
You should get your clawback terms in writing first. But that’s only the beginning. The test is whether those terms will hold up in court when a rep eventually decides to challenge them.
Your employment agreement and compensation plan documents need tight language if you ever end up in a dispute with a rep. Businesses have lost in court before because their clawback provisions used vague language or could be interpreted in multiple ways. Ambiguity is your enemy with these clauses, and you have to spell out in specific detail what actions trigger a clawback and when those consequences kick in.
First, lay out the exact circumstances that give you the right to recover the money. If a rep violated company policy, you can’t simply leave it at that. You need to define what that violation actually means in concrete terms. They might have falsified records or cut corners on compliance requirements. The level of detail you use to describe the behavior or situation that triggers the clawback will strengthen your position if this ever lands in court.
State laws are going to have a big effect on how this works. Different states put different limits on what employers can deduct from paychecks or final wages. California is one example – the state has some strict protections for employees and any commissions they’ve already earned. Your team members may be in different locations, so you should adjust your clawback language to make sure that you’re following the requirements in each area.
The timing of these agreements is as important as the language in them. Make sure that they’re signed before a rep starts work or before a new compensation plan takes effect. You’re going to run into problems when you try to introduce clawback terms after employment has already started. A court may see that as you trying to change the deal without giving them anything in return.
When your clawback language stays vague, you’re inviting arguments and damaged trust within your team. A sales rep might believe that they earned their commission legitimately. But you have a different view of what actually happened. Disagreements like that can get expensive and messy very quickly. On top of the immediate problem, they also make it far harder to keep the rest of your team’s satisfaction once the word starts to spread about the dispute.
What you want is to protect your business while still being fair and transparent with your sales team. Proper documentation helps everyone to know the expectations right from the start.
How Far Back Can You Reach
Businesses need to decide how far back they can reach when they need to recover commissions from their sales team. Some businesses write their compensation plans with no time limit attached, and this usually becomes a big mistake for everyone involved.
Sales reps who find out they can be held responsible for deals that closed years ago will never feel safe about the money they’ve already earned. Once they know that this could hit them, it’s going to weigh heavily on their choice to stay with your company for the long haul. Some reps have received clawback notices months or years after they had already moved on to a new job. These wind up turning into messy legal disputes that cost each side far more than the original commission was even worth.
Most businesses set their clawback window between 6 and 12 months. This range gives them enough time to catch any problems with the deal. But it also gives sales reps a fair endpoint where they’re no longer responsible. After that window closes, the commission is locked in, and reps can finally stop worrying about it.
A few businesses go even further and use a sliding scale based on when the deal died. If it cancels within the first month or 2, they’ll recover the full commission. Then the percentage drops as more time passes. That makes sense – a deal that dies months later probably isn’t connected to what the sales rep did or didn’t do.
This type of structure protects each party, just in separate ways. The company leaves its options open if something goes wrong early on in the deal. The sales rep gets more confident as time goes on and can count on that money as actually earned. And everyone knows the timeline from day 1, and it makes the whole process feel much more fair across the board.
Write these time limits down directly in the compensation plan itself. Sales reps need to know for sure when their liability ends for any deal that they close, and it should be in writing for everyone’s benefit.
Pick the Right Recovery Method for You
The math behind your clawback policy matters just as much as the time windows you set. Recovery formulas can be built in a few ways, and each one has to match whatever situation you face. Most businesses find that a graduated approach works better than a single flat rate across the board.
A graduated recovery system is easier to follow than it sounds. If a customer cancels within the first 30 days, the company takes back the full commission from that sale. Between 31 and 90 days, that recovery amount gets dropped to half of the original commission. After the 90-day mark passes, the clawback drops even more – maybe down to just a quarter of what was originally paid out.
This graduated approach makes plenty of sense because time changes what the transaction means. If a deal falls apart in the first month, there were likely red flags from day one. A customer who sticks around for 3 months is a different story – they had a genuine relationship with your company. Your rep got them to stay for a reason, and that work deserves some credit.
All-or-nothing clawback policies can backfire on you pretty fast. Some businesses will try to take back the entire commission no matter when the customer leaves. When this happens, the top performers start to look for other jobs. Reps don’t want to live with that uncertainty hanging over their paycheck month after month.
How much work your rep puts into the sale matters for what you recover. Your rep could have just picked up the phone and taken an order from a customer who was ready to buy, or they’d have spent months building that relationship and convincing the customer to commit. Those two scenarios need different recovery amounts.
The approach that works best is to match your recovery formula to what actually happened in each case. Your goal is to protect the company from bad deals. But you don’t want to punish your reps for circumstances that were out of their hands. A customer who leaves because of a product issue is very different from the one who never planned to stay for the long haul.
Better Options for Your Commission Recovery
Plenty of businesses out there demand an immediate check from their sales reps the second a clawback situation happens. This creates a strain on the relationship and puts heavy financial pressure on your sales team at the same time. The upside is that a few other recovery methods are available, and most of them work out much better for everyone involved.
Draw recovery is probably the most popular option. You don’t ask the rep for a check – you just take it out of their future commissions until they’ve paid back what they owe. The rep continues to work and earn as usual. But a slice of each commission payment gets applied toward their balance.
Commission holds work a little differently. But they accomplish the same goal. The way that this works is that you hold back a set percentage from each commission payment and put it aside during the clawback period. As long as the deal stays in place, the rep will eventually get that money paid out. When it falls through, you already have the money there to cover the refund. The whole point here is to stop the problem before it turns into one.
It’ll keep your relationship with your sales team in a much better place than demanding immediate repayment. The alternative (to ask a rep to hand over thousands of dollars right away) creates tension and resentment pretty fast. Most reps have already spent that money on their mortgage, car payment and everything else in their life. Letting them work it off over time or setting aside reserves from the start feels way less like punishment and more like normal business practices.
Payment plans work well for reps who have already spent their commission money and can’t pay it all back at once. Splitting the repayment into smaller chunks over a few months makes it much more manageable for everyone. Some businesses also choose to write off the smaller amounts instead of collecting them. The time and resources that it takes to chase down a few hundred dollars will usually cost more compared to what you’d recover anyway.
The best time to sort this out is well before you need it. Pick which recovery methods work for your situation ahead of time and add them directly into your compensation plan. That way, your whole team already knows how it works when you need to claw back money.
Level Up Your Incentives and Rewards
One more point before we continue – we should talk about what a strong clawback policy actually looks like in the world. The best clawback policies are the ones you almost never actually need to enforce. Qualifying customers properly from day one and having your customer success team do their job well during the entire partnership means most situations where you’d need a clawback just won’t come up at all. That right there tells you where to focus your time and money.
The right compensation structure can make or break your team’s performance and your bottom line, and the little details do matter. Level 6 works with businesses of all sizes to design and fine-tune incentive programs that actually fit their needs. We work on everything from sales team numbers to employee happiness and involvement every day. Branded debit cards, employee rewards programs and sales incentives – we build custom programs for every client because no two businesses face the exact same challenges. The goal of each program is to get measurable results that move the needle for your company. Contact us for a free demo to see how this works in practice, and we can talk about the ways that we help high-performing businesses maximize their ROI and their sales performance.
Claudine is the Chief Relationship Officer at Level 6. She holds a master’s degree in industrial/organizational psychology. Her experience includes working as a certified conflict mediator for the United States Postal Service, a human performance analyst for Accenture, an Academic Dean, and a College Director. She is currently an adjunct Professor of Psychology at Southern New Hampshire University. With over 20 years of experience, she joined Level 6 to guide clients seeking effective ways to change behavior and, ultimately, their bottom line.
