Definition
Revenue reclamation and reverse commissions (i.e., “claw backs” in industry parlance) are the practice of recovering commissions that have already been paid out to a salesperson by deducting them from current or future compensation. They can occur for a number of reasons but are primarily enforced when a client has been refunded all or a portion of the service they had contracted from the vendor.
Sample
In an effort to better understand and quantify the prevalence and use of these contract provisions, I surveyed a group of 226 Chief Revenue Officers and Senior Vice Presidents of Sales in the greater Marketing Technology landscape. Sixty-six leaders contributed substantively to the discussion. They hailed from firms of between 23 and 26,000 employees, with a mean of 125 employees. The mean firm where the respondents were leading all sales operations was a series B or series C funded firm that had raised between $50mm-$100mm. The vast majority of the sample sold their solutions into “enterprise” clients in either the IRC 500 or top online merchants in the U.S. or the Global 2000. The mean annual contract value (ACV) of the sample solutions was $175,000.
Method
Participants received an email via LinkedIn where they were asked if they currently utilized claw backs, and if so, under what circumstances. Responses were all free form and will be summarized as follows.
Prevalence
Clawback provisions appear in over 75% of the respondents’ sales contracts or commission plans. The provision appeared in all firms with more than $200mm in annual revenue. All but three respondents did not currently or previously have a clawback provision written into their sales contracts. Eighteen respondents were currently employed by seed to series A funded startups, and eight of those had clawback terms in their compensation plan.
Application
In order to set a baseline for responses, each CRO was given a scenario under which the sales representative had sold a solution utilizing best business practices. In these instances, they had exercised the limits of their ability to assure that the client was well qualified and would benefit from the solution, the professional services organization had signed off that they would be able to implement the solution, and that the success team had signed off that they could onboard the client successfully to utilize the solution based upon prior engagements. Under those circumstances, all but one CRO stated that they would never approve a clawback unless the implementation were to fail, the client did not derive benefits promised, or the client did not implement the solution due to internal business changes.
Several stated that were the viability of the business as a whole put in jeopardy due to refunding a client, the clawback might be inevitable, but that the sales executive should be compensated in other ways such as additional stock grants, deferred compensation, or reallocation of opportunities in process they might otherwise have not had in their pipeline.
One executive stated that in a small firm, each employee was “in it together” and as such should be expected to sacrifice their commissions whenever a refund was processed for a client Over a third of the respondents had clawed-back commissions for solutions where the client did not derive expected benefits. Fully three quarters of respondents had clawback provisions written into their commission’s contracts, with the bulk of the application of those clawbacks taking place due to failed implementations for technical reasons. Twelve of the surveyed CROs did not have clawback provisions in their sales commission’s contracts at all, and of those, only seven had never had one in any of the contracts that they had written.
Discussion
The overwhelming opinion of the group was that clawbacks were exceptionally negative, and even in the case of business necessity, counter-productive. Respondents who had utilized clawbacks did not furnish statistics regarding subsequent turnover amongst sales executives impacted by the clawbacks. Nine offered anecdotal evidence of hastened departures of those sales executives and generally decreased in morale and productivity of the sales force. More than a half-dozen cited examples of litigation being pursued by sales executives to recoup lost commissions, and in each case where the firm remained viable, they had succeeded in those efforts.
Over a third of the respondents went to great lengths to explain how important it is for the leadership to assure that the sales executives were signing “good” business. Those CROs made a point of their sales processes being a multi-pronged affair involving the department heads of technology, services, and success to assure that each deal was thoroughly vetted and within scope. They viewed clawbacks in very hostile terms, as their salespeople had to coordinate numerous internal sales motions across departments leading up to a sale in addition to driving the buying committee to their respective clients, so for them to be penalized for a failure post-sale involving those other departments was unacceptable. Not surprisingly, those leaders were amongst the most successful polled. It was made plain by many leaders that if clawback language was included in the sales contract, it must be discussed openly and explored at length with the team, and that its application must be uniform, and again, only as a last resort.
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