Sales reps close a deal, and their commission check arrives. When only 80% of it shows up, and somebody in finance mentions something called a “holdback period,” that rep is going to want answers about where the rest of their money went and when they’ll actually see it. What reps earn versus what they take home each month – well, that gap creates financial stress for sales teams who are already planning around that income to pay their bills and cover day-to-day costs. Finance teams have their own challenges to manage as well – they’re responsible for protecting the company from the deals that could fall through later. But they also can’t put policies in place that will destroy morale across their best performers.
Frustration builds up fast when commission plans fail to mention the holdback terms anywhere in them from the start. A rep’s $10,000 commission might be scheduled to arrive within 30 days – but $2,000 of it will actually sit untouched for another 3 months. When businesses aren’t upfront about these delays, the trust between sales and finance teams tends to break down pretty fast.
Businesses use holdbacks to protect themselves from the money problems that happen – customers who cancel during the trial period, contracts that get scaled back or cut down or credit card payments that don’t go through. Most of these policies actually do make sense for the business to have, at least as long as the company is open and honest about the terms and applies them the same way every time. What gets tough is striking the right balance between protecting the company’s bottom line and treating the salespeople fairly when they’ve already done the work to close the deal!
Let’s talk about how holdback periods work and why businesses use them!
How Holdback Periods Work for You
Holdback periods are waiting windows that delay part of your commission payment. Your company will actually hold onto a percentage of what you earned until they can verify the sale is final and won’t get reversed. The length is different from one company to the next. But most holdback periods fall between 30 and 90 days after you close the deal.
Most businesses will hold back between 10% and 25% of whatever commission you earn on a sale. If we’re talking about a $10,000 commission check, that means you’d probably receive around $8,000 when the deal actually closes. The other $2,000 gets held until the holdback period is over, and they finally release it to you.
The money doesn’t actually disappear or get taken away from you permanently. It’s more like a temporary hold on a part of what you’ve earned. After the waiting period ends and the sale is still valid, the held money gets released to you. Businesses do this because they want to protect themselves from situations where a customer might cancel their order or return the product. If they paid out your full commission immediately and then had to process a return a week later, they’d be stuck trying to claw that money back from you.
Holdbacks work a bit differently than clawbacks. With a clawback, the money gets taken back after you’ve already been paid. A holdback delays a part of your commission from the very start. Commission caps and quotas work on a different principle – they put a hard limit on how much you can earn in total. A holdback doesn’t limit anything – it delays a part of your earnings until everything gets verified and worked out.
Holdback periods work as a safety cushion for the company. The waiting period gives them time to make sure that the sale is going to stick and the customer will follow through with payment. The commission is yours (no question about that), and the payout will come through. But it just takes a bit longer before the full amount shows up in your account.
Why Companies Have Holdback Periods
Software businesses with 14-day free trials run into this problem all of the time. A sales rep closes ten deals in a month and gets their commission checks right then. Fast forward 2 weeks and half of these customers will cancel before the trial period ends. The company has already paid commissions on revenue that’s never going to hit their bank account. Gyms run into this exact same issue every year. January brings in a massive wave of new members, and the sales team collects its commissions right away. A month later, in February, half these new members have stopped showing up or have cancelled their memberships, and the gym has already distributed the money based on contracts that didn’t pan out.
Credit card chargebacks happen in a very similar way. A customer can dispute a charge weeks after the sale or sometimes even months later, and when they do, the company has to issue a full refund back to that customer. On top of that refund, they also get stuck with the processing fees from the credit card company. The sales rep already got their commission from that very same sale – probably weeks or months before the chargeback ever came in.
All these costs can pile up pretty fast and cause cash flow problems for any business. Most businesses will set their commission budget based on how much revenue they expect to bring in over a given period. When a deal falls through after the commission check has already been cut, the business ends up with a difference between what they paid out and what they actually earned from real, completed sales. Holdback periods give the company enough time to make sure that a deal is actually going to stick before they hand over the full commission amount. It’s not a punishment for the sales team or a way to unfairly withhold their money – it’s just about verifying that the revenue is legitimate and will actually show up in the company’s account.
Types of Holdback Systems and Terms
Every company manages its holdback periods a little differently, and most of that depends on how its business actually operates and what its sales cycle looks like. A SaaS company will usually hold onto commissions for 90 days or longer because it needs to make sure that its customers stay on board after that trial period ends. Retail businesses usually work with much shorter holdback periods (usually around 30 days) since their sales close out way faster.
A lot of businesses will also set up tiered holdback systems to better match the percentage with the actual risk level of each deal. A brand new customer deal might carry something like a 20% holdback because it carries more uncertainty when you’re working with an account that’s unproven. Renewal deals with existing customers might only need a 10% holdback since the relationship has already been established, and you have a proven payment history to look at, and each tier just shows a different level of uncertainty and lets the holdback percentage scale up or down depending on how much confidence you have in that particular transaction.
The holdback percentage changes quite a bit and depends on a few different factors. For example, if a partner has a proven track record of bringing in quality customers month after month, businesses will usually lower their holdback percentage. It’s their way of saying thanks for being reliable. The deal size plays into this calculation, too – when you’re working with bigger contracts, you’ll usually see either longer holdback periods or higher percentages attached to them. That makes sense because more money is on the line that needs to be protected.
The normal holdback periods look different depending on the industry that you work in. Businesses in financial services usually go with longer holdback periods, and businesses in consumer goods usually have them much shorter. This information puts you in a much better position for when you eventually need to sit down with your employer and have a conversation about whether your terms are actually fair.
Legal Rules for Your Business
Legal compliance is a big consideration with commission payments. Every state has its own set of laws on this, and some states get very specific about when those payments need to happen. California and Illinois are perfect examples – they have prompt payment laws that spell out when the commission checks have to go out. Businesses don’t have much flexibility with these deadlines, so it really matters to follow these laws.
The legal side of holdback policies deserves real attention. Businesses have been hit with legal claims over the years because their policies left too much open to interpretation or were just plain vague. When sales reps can’t pin down the exact date that they’re supposed to receive their money, judges usually side with the employee – not the company.
A written commission agreement is one of the documents that matters most for your business, even when you’re just starting out. Memory is unreliable – what you talked about six months ago can fade or change over time, and it’s normal for both sides to walk away from the same conversation with different understandings of what was agreed upon. Putting the terms down in writing creates a concrete record that protects everyone who’s part of the deal.
A lot of businesses run into problems when they fail to stick to their own policies. Any changes to your holdback terms need to be communicated to your sales team well in advance – otherwise, you’re going to run into some legal complications later. Minor inconsistencies in how you apply your policy might not feel like a big deal when they happen. Over time, though, these small mistakes can become much bigger problems that cost a lot more to fix.
Class action legal claims are a real risk if your holdback practices aren’t handled correctly. When multiple salespeople feel like they’ve been shortchanged, they can band together and file a joint lawsuit against you. Legal claims like this will drain your resources fast, and they’ll damage your company’s reputation in ways that can take years to repair. Your records are going to be your strongest defense if this ever happens to you. You should keep full records of the holdback policy and give a copy to each new hire when they start.
Other Ways to Protect Your Commissions
Businesses have a handful of different options for protecting themselves from commission overpayments. None of them actually need you to hold back the money from your sales team indefinitely, and each one has pros and cons that matter for your business and your commissioned sales reps.
A clawback provision is probably one of the simplest ways to handle this. With a clawback, you can pay out the commissions right away. The company just reserves the right to reclaim that money later if something falls through with the sale. Sales teams love this because they get their earnings much faster, and morale stays high. If a customer cancels or returns the product within your set timeframe, you can recover the commission that you already paid out.
A different strategy that’s a great fit for a lot of businesses is the risk-based system. The way it works is pretty simple – you hold back the payment only on the deals that look suspicious or a bit too risky. Say a brand new customer places an order, and that one gets held for a little while before the rep gets paid. A repeat order from a customer who’s been around for years gets that commission paid out in full right away. It protects the company where the risk is actually highest, and you don’t have to put each and every sale through the same approval process.
An escrow account could be another great choice worth looking at. With this arrangement, a neutral third party takes possession of the funds and holds onto them for you temporarily. The money just sits in that account and collects a little interest during the waiting period. Once the parties involved agree that the deal is legit and done, the funds are finally released to finish the transaction.
Performance bonds and insurance products are one more option that could work well. What these do is move the risk away from your company and your sales team to a third party that specializes in this type of coverage. The bond or insurance premium just shows up as another business expense instead of a deduction from the commission checks.
Which option works best for your business depends on your priorities as an owner or manager. Each plan has its advantages, and no single option is objectively better – it’s a balancing act between financial protection and team morale. You should weigh how much liability protection your company actually needs against how important it is to keep your sales team motivated and fairly compensated as you make this call.
Level Up Your Incentives and Rewards
Holdback periods are one issue that puts two different groups at odds, and each side has valid reasons for feeling the way they do. Businesses need some type of safety net when deals don’t work out or when customers cancel before they should. Salespeople need to feel confident that the money they’ve already earned is actually going to land in their account at the right time. Balance is everything with this policy, because if you get it wrong, the trust between everyone involved starts to break down, and it can take months (or even years) to repair that sort of damage, and nobody benefits from that situation.
Commission software now works with holdbacks differently, and it’s made matters much better for sales teams. Salespeople can log in and see just how much money they have sitting in pending commissions. The software tracks holdback amounts as they happen. Once the deal is done and everything checks out, the system releases the payment automatically. That level of transparency cuts down on the frustration that older holdback setups used to have when reps would just sit around waiting with zero information about when they’d actually get paid. When everyone has access to the same data and knows the timeline, most of the problems disappear on their own.
If your company already has holdbacks in place, or if you’re thinking about adding them to your compensation structure, there are a few steps worth taking. You’ll want to review your policies to see if they match up with the problems you’ll have to guard against and check the labor laws in your state or region – some places have strict limits on how long you can hold onto wages already earned. Honest conversations with your sales team about why these policies exist can help, especially when you actually listen to their concerns around fairness and cash flow.
A well-designed holdback program can change the relationship between your sales and finance teams. The friction starts to fade, and the two sides start to work together more like partners than opponents. Level 6 specializes in building incentive programs that get your entire team motivated as they protect your business from unnecessary losses. Our programs include branded debit cards, employee rewards and recognition systems and customized sales incentives. Every program gets designed around your goals and challenges – cookie-cutter solutions don’t usually deliver what you need.