Sales commission clawback clause and examples
Sales commission clawbacks are a common practice in sales compensation plans that allow companies to recover overpaid commission amounts from their sales representatives.
A commission clawback clause is a provision in a sales compensation plan (emplyment agreement) that outlines the conditions under which commission payments can be clawed back.
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A commission clawback clause typically specifies the circumstances under which a clawback can occur, the method of clawback, and the time period during which the clawback can occur.
The clause may also include provisions related to overpayments, underpayments, and disputes.
Let's take a closer look at a commission clawback clause and an example of how it may work in practice.
Commission Clawback Clause Example
The following is an example of a commission clawback clause:
"Commission Clawback: In the event that a sales representative receives an overpayment of commissions, the company reserves the right to claw back the overpaid amount. The clawback will be calculated based on the amount of the overpayment, and the amount will be deducted from future commission payments until the overpaid amount has been fully recouped. The sales representative will be notified of the clawback, and the company will provide an explanation of the reasons for the clawback. The clawback will occur within 90 days of the overpayment."
The above example provides a basic outline of a commission clawback clause. We will go on later below to examine the key components of the clause in more detail.
Sales Teams did the work and deserve to be paid. The finance team can go along way in ensuring this BY USING TOOLS that make sure the invoices get paid on time.
Unpaid Invoices are the MAIN REASON for commission clawbacks and businesses have easy tools to ensure they actually collect and avoid commssion clawbacks like Carol Collect HERE
Common practice. In summary, clawback sales commission are a common practice in sales compensation plans. The key is that it needs to be explicit and well communicated and understood by the sales teams.
Lets dive in abit more
Circumstances Under Which a Clawback Can Occur
The first part of the clause above specifies the circumstances under which a clawback can occur.
In this example, a clawback can occur if a sales representative receives an overpayment of commissions. This overpayment may be due to a mistake or error in the commission calculation, or it may be due to a change in the sales representative's employment status or MOST COMMON is the invoice is not paid by the client.
Method of Clawback
The second part of the clause above outlines the method of clawback.
In this example, the clawback will be calculated based on the amount of the overpayment, and the amount will be deducted from future commission payments until the overpaid amount has been fully recouped.
This means that the sales representative's commission payments will be reduced until the overpaid amount has been fully recouped. The clawback will occur within 90 days of the overpayment.
Notification and Explanation
The third part of the clause specifies that the sales representative will be notified of the clawback, and the company will provide an explanation of the reasons for the clawback.
This is important because it ensures that the sales representative is aware of the clawback and understands why it is occurring.
Provisions Related to Overpayments, Underpayments, and Disputes
The final part of the clause may include provisions related to overpayments, underpayments, and disputes.
For example, the clause may specify how underpayments will be handled, or it may outline the process for resolving disputes related to commission payments.
Example of a Commission Clawback in Practice
To better understand how a commission clawback may work in practice, let's consider the following scenario:
Jane is a sales representative for a software company. Her sales compensation plan includes a commission clawback clause.
In January, Jane receives a commission payment of $10,000.
In February, the company discovers that there was a mistake in the commission calculation, and Jane was overpaid by $2,000 in January.
The company notifies Jane of the overpayment and explains the reasons for the clawback. The company also informs Jane that it will recoup the overpaid amount by deducting $2,000 from her commission payments in February and March.
It creates stress on all sales teams and important there is explicit and clear communication. It is important that businesses do all in their power to collect invoices and avoid commission clawbask, like using Carol Collect below.
When the sales team have done the sale, it is up to finance team to collect the invoices.