The quick guide to clawbacks in sales commission plans

If you run a sales team and sell subscription licences, you’ve probably heard of or used clawbacks in your commission plans. You’ve also likely experienced the pushback from the sales teams and their cries of demotivation — especially when clawbacks show up by surprise in their payslips.

Let’s start from the top, what exactly are Clawbacks?

Clawbacks are simply commission payments that are returned to a business by an individual sales rep or team. Clawbacks typically occur when a customer refund is requested or when a customer churns within a set period of time — after a deal has already been won and or paid.

Why do we use them?

Clawbacks are considered essential in certain types or stages of business:

• You sell a subscription product / service and churn is an issue

Companies that sell a subscription service like SaaS will often weigh the lifetime value (LTV) of the customer over the initial value of the customer. If a customer churns too soon, you may find it important to apply clawbacks to focus the attention of your sales team on selling to your ideal customer profile.

• Commissions are paid before the customer pays

Companies often pay out commissions as fast as possible to ensure the sales team is incentivised to hit their targets, i.e. paying a rep. full annualised commission on monthly / quarterly deals. Research shows the power of reducing the time between reward and desired behaviour, yet offering commission before a customer pays carries its own risk that business needs to consider.

• Cash flow is critical

When you’re still discovering who your ideal customer is, with a smaller sales team who handle the entire sales process or in a tough economic environment — you may find it important to apply clawbacks to focus the attention of your small sales team on selling to the right customer and delivering the best possible service.

• You award commissions on proof of concepts

If you’re selling POC’s and awarding commissions, often it’s the responsibility of the sales rep and other staff in your company to ensure a successful rollout. A commission can be awarded on the landing the POC, but often a clawback is applied if it doesn’t transfer to a full paying account.

Examples of clawbacks:

• Hubspot: Has a four-month clawback period. If a customer cancels their plan between one to four months after signing up, the salesperson who sold this item is forced to give back their commission payment. This ensures reps focus their time and attention on businesses that can really benefit from the product.

Complexities to consider with clawbacks

• Be clear on the trigger for clawbacks: Ensuring your comp. Plan explicitly states when the company reserves the right to apply clawbacks on deals that hit specific criteria.
• When to apply clawbacks: Once payroll has been run, and a clawback applied to prior deal, it’s important to claim the clawback at the correct rate or multiple it was awarded at, this is especially important if you have tiered or accelerated commission plans.
• Transparency: Offer transparency to the sales team, make it easy for them to follow why clawbacks have been applied, which deal they’re applied to, and the effects on their current payout. Transparency is one of the most important aspects to promote trust, expect initial feelings of anger when clawbacks are processed - it’s therefore important that we temper these initial feelings with clear ‘explainability’ behind the clawback and the sales team is informed as early as possible.
• Demotivation: Clawbacks can naturally feel demotivating to the sales team, but it’s important to help them understand why it’s in place — you’re backing their success but it also needs to align with the success of the business.
• Attribution between teams: You can also ensure incentives are shared across teams based upon the successful rollout of a service or product for customers. If you require successful onboarding before releasing commissions, but you have additional teams like technical engineers and customer success to help this roll out — ensure everyone is on the same page with incentives, otherwise the sales rep. will naturally feel angry when a deal churns or a refund is applied.

How motiveOS handles clawbacks

• We apply clawbacks at a deal level, making it easy for the rep to follow what deals clawbacks have been applied to.
• We allow for a clear dispute process inside of motiveOS which makes it easy to follow the payout process for both the Finance and Sales Team.
• We automate this entire process for the business, taking the stress away from the finance and sales team — and promoting more trust on the sales commission process.
• We calculate the clawback at the multiple it was awarded at, a special and complex consideration if you have accelerators or tiers.

If you’d like to learn more about how we handle clawbacks, you can schedule a demo of motiveOS today at www.motiveOS.com.

motiveOS is a realtime commission app that provides accuracy and visibility to the revenue, finance and management team, and automates the entire process for the business using the tools your team already use today. We’re on a mission to help growing businesses build world class revenue teams.