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What started as a way to prevent reckless corporate behavior and protect shareholders' interests due to Wells Fargo's cross-selling scandal, clawback soon became a practice adopted by multiple companies across the globe. Moreover, it put the need to ground the Dodd-Frank Act into the policy.
The incident occurred in 2016, prompting Wells Fargo to revise its management, risk, and control frameworks. Fargo also changed its culture and clawback policies to rebuild trust and address the issues that led to the scandal. However, it opened an opportunity for companies across different industries worldwide to revise their clawback policies.
The clawback policy is seen as a tool in organizations to discourage excessive and inappropriate risk-taking by the representatives. In 2016, Wells Fargo employees, 5,300 to be exact, opened 2 million unauthorized accounts, leading to the bank clawing back 185 million dollars in executive compensation. This reinstates the purpose of the clawback policy.
The purpose was to enable a company to recoup incentive-based compensation paid to an executive if it later turns out that the financial statements containing such metrics were flawed or unethically sourced. Keeping Wells Fargo as the contemporary example of 'clawing back', one can say that the consequences of violating a clawback policy can be significant.
What is clawback?
Clawback, according to NASDAQ, refers to "an arrangement whereby the equity owners commit to using dividends they have received in the past to finance the cash needs of the project or corporation in the future."
Easily put, clawback is a contractual provision that allows a company to take previously disbursed compensation or benefits, typically associated with performance-based pay like bonuses.
Its purpose is to uphold accountability among employees. It allows the organization to recover compensation if an employee engages in misconduct or if there is a significant correction of financial records.
Now that we have understood the meaning of clawback, let us scrutinize how the mechanism of clawback provision works.
What is clawback provision & how does it work?
Clawback provisions refer to contractual clauses that require the return of money or other compensation under specific circumstances or events. They are often used in financial employment agreements to regulate bonus payments and protect against financial losses, fraud, or misconduct. Clawbacks are designed in a way to also promote better financial practices, deter fraudulent activity, and encourage sustainable sales behavior.
In the financial sector, clawbacks are commonly applied to employment contracts to control executive compensation and prevent fraud. They can be triggered by long-term variations of financial instruments, misconduct, or erroneous financial reporting. The Dodd-Frank Act aimed to expand clawbacks even further, but the proposed rule has not been approved.
For sales organizations, clawback clauses allow a business to reclaim commission or other performance-based compensation paid to a salesperson when a customer churns or cancels their purchase within a specified period.
This helps protect the business from financial losses due to customer churn and encourages sales reps to pursue high-quality deals and improve customer experience.
- Between 2005 and 2010, the number of big companies in the Fortune 500 using clawbacks went up a lot. At first, less than 3% used them, but then it jumped to 82%.
- According to ISS Corporate Solutions, over 90% of S&P 500 companies have rules for clawing back money and stocks. But for the Russell 3000, which doesn't include the S&P 500, only a bit more than half have similar policies.
- A Harvard-based research has shown a 94% adoption rate among S&P 500 healthcare companies. However, only about 31% of healthcare companies outside of the S&P 500 have such policies in place.
The quantified study of the clawback seeds in the significance of placing the clawback policy in the agreement. However, there are more reasons to include clawback policy in the sales commission plans.
However, to include clawback policy in your provision, you must know the types of clawback that there are.
Types of clawback clauses
Here are the types of clawback clauses with brief explanations and examples:
1. Negative quota credit
This type of clawback reduces an employee's commission or bonus if they fail to meet a specific sales target. Let's say a salesperson earns a $5,000 bonus for exceeding their quota by 10%.
But, if the clause includes a negative quota credit, and the salesperson falls short of their quota by 5%, a portion of their base salary or previous commissions might be reduced by an amount proportional to the missed quota.
2. Retroactive negative quota credit
Similar to a negative quota credit, this provision allows the employer to claw back commissions or bonuses already paid to the employee if they fail to meet their quota within a specified timeframe, which can extend beyond the current sales period.
3. Commission-only clawback
This clawback applies only to commissions earned by the employee. If the employee fails to meet specific performance metrics or breaches their contract, the company can withhold or recoup all or a portion of the commissions paid out.
Clawback provisions examples in sales commissions
Clawbacks in sales are essential to maintaining a fair commission structure while protecting companies from financial risk. Below, we explore three common methods of handling sales clawback scenarios.
Quotas and commission structure
Let’s say Emma earns a commission based on the annual recurring revenue (ARR) of closed-won deals within a quota period. In Periods 1 and 2, the quotas are $150,000 and $300,000, respectively. Emma receives a 10% commission on deal ARR until she reaches her quota (Tier 1) and 20% for any amount exceeding the quota (Tier 2).
Commission and clawback rules
Commissions are paid on bookings but are subject to a clawback provision in case of customer non-payment. Below are the closed deals for Periods 1 and 2. At the end of Period 2, the company determines that Deal A will not pay, triggering a sales clawback.
Clawback method #1: exact payout amount
This is the most common method due to its operational simplicity and intuitive nature for sales teams.
Since Emma earned a $5,000 commission for Deal A, which was not fulfilled, she must return $5,000.
This method ties clawback amounts to when a deal was closed within the quota period. For example, since Deal A was closed within Tier 1, the clawback amount is 10% of ARR. However, if Deal C had been clawed back, the amount would have been $15,000 (20% of ARR).
Why we like Method #1
- Most intuitive and easy to understand.
- Simple for both employers and sales reps.
- Ensures fairness in clawbacks in sales commissions.
Clawback method #2: negative quota credit to current period
This method reduces Period 2’s quota credit by treating the clawback as a negative sale amount, effectively reducing current-period attainment.
By adding Deal A’s clawback as a negative sale, this method is easy to automate in spreadsheets and CRMs. However, it could incentivize sales reps to defer deals to future periods to avoid negative quota impacts.
Why we like Method #2
- Operationally simple and easy to automate.
- Clear commission statements.
- Eliminates the need for historical payout reference.
Clawback method #3: negative quota credit to past period
This method retroactively adjusts the previous period’s quota attainment to reflect the clawback. Unlike Method #2, this prevents negative incentives in the current period.
This method is more complex as it requires recalculating past commissions and adjusting payouts accordingly. Companies using ASC 606 for cost capitalization need to ensure proper compliance when implementing this method.
Why we like Method #3
- Balances fairness between employer and salesperson.
- Prevents negative incentives to defer sales.
- Avoids impacting current-period commissions negatively.
Final thoughts
Clawback provisions in sales ensure financial security for companies while maintaining a fair commission structure.
What are some common benchmarks used to determine clawback in sales?
The most common benchmarks used to determine clawback in sales are:
1. Quota attainment
This is the most fundamental benchmark. Clawback provisions often kick in if a salesperson falls below a pre-defined percentage of their assigned sales quota for a specific period.
2. Sales accelerators
These are bonuses or incentives offered to salespeople for exceeding specific targets. Clawback can be applied to these accelerators if the salesperson doesn't achieve the underlying base quota or other performance metrics.
However, companies should communicate clearly with sales reps about integrating the clawback clauses and their implications. This can help prevent misunderstandings and ensure that sales reps understand the potential consequences of their actions. For such an aspect, maintaining the best practices in clawback navigation would help.
Why should you include clawback clauses in your sales commission plans?
Clawback clauses are essential to include in sales commission plans to protect the company from financial losses due to fraudulent activities, illegal sales, or non-compliance with company policies. Consider including clawback clauses in your sales commission plans for several key reasons:
1. Reduced financial risk
Clawbacks can help mitigate financial risk by recouping commissions on sales that don't translate into long-term benefits for the company. This could be due to customer churn, product returns, or fraudulent activity.
The policy applies if Airbnb's publicly disclosed financial statements must be restated due to fraudulent or willful misconduct by the employees or executives.
It provides the Leadership Development, Belonging, and Compensation Committee or the board of directors with the discretion to recover cash incentives, equity awards, or other compensation of at-fault employees.
2. Enhanced legal protection
Clawbacks provide a layer of legal protection in cases of fraud or misconduct by a salesperson. If a commission was earned through illegal or unethical means, the clawback clause allows the company to recover those funds.
3. Alignment with business goals
Clawback clauses can incentivize sales behaviors that contribute to the company's long-term growth. By potentially recouping commissions on short-term gains that don't translate into customer retention or satisfaction, clawbacks encourage salespeople to focus on building sustainable value.
This rule applies to incentive pay received after October 2, 2023. A committee appointed by the board will oversee this and follow Nasdaq Rule 5608.
4. Incentivize sales behaviors
Clawbacks in sales play a crucial role in enhancing the overall customer experience. Instead of collecting their commission and moving on, sales reps have a vested interest in ensuring customer satisfaction throughout the onboarding process.
This is particularly valuable for SaaS providers and other subscription-based businesses, where long-term retention outweighs the impact of a single sale. By implementing a clawback sales commission structure, companies give their reps extra motivation to align with this long-term success mindset.
How Compass simplifies clawback management
Compass streamlines the clawback process, ensuring accuracy, transparency, and efficiency.

Here’s how it works:
- Identifying deals and participants – Compass helps pinpoint past deals requiring clawback and identifies the participants involved.
- Determining commission adjustments – It calculates the amount paid to participants and determines the clawback amount based on pre-set logic, such as a percentage of the paid commission.
- Seamless deduction process – The clawed-back amount is adjusted from either the current month's commission or future payouts, ensuring minimal disruption.
- Validation and approval – Data validation and pre-defined approval workflows ensure accuracy before any clawback is processed.
- Complete transparency – End users gain full visibility into their clawbacks, including details on deals, deducted amounts, and any relevant comments from approvers.
- Ad-hoc clawbacks – Admins have the flexibility to initiate clawbacks for specific payouts from any commission plan, with a dedicated audit trail for both admins and users.
Through Compass, admins can efficiently set up and manage clawback provisions, while end users can conveniently track their clawbacks via the mobile app.

Additionally, users can view, email, or download their relevant transactions, ensuring complete control and transparency over their commission adjustments. Schedule a call now!
Best practices for navigating clawback clauses
To navigate clawback clauses effectively, it is important to follow several best practices. These practices include:
1. Seeking legal advice
It is crucial to consult with legal experts when creating clawback clauses to ensure they are legally valid and enforceable. This can prevent potential disputes and legal proceedings.
2. Establishing clear and fair clawback conditions
Clawback clauses should be straightforward and fair, with transparent conditions outlining when commissions can be reclaimed. This helps prevent misunderstandings and ensures that sales representatives are aware of the potential consequences of their actions.
3. Regularly reviewing and updating clawback clauses
Companies should periodically review and revise them to maintain their effectiveness and relevance. This process may involve analyzing past instances where the clause was invoked to assess its impact on both the business's financial performance and sales outcomes.
Recent laws regarding clawback clauses
- The new rules, implemented in October 2022, are part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
- Listed companies must follow new SEC Clawback Rules.
- These rules require companies to get back incentive-based compensation awarded based on mistakes in financial statements. This applies to most companies on major stock exchanges, regardless of the officer's knowledge or misconduct.
- According to recent laws, companies cannot protect officers from these clawbacks, and both major and minor accounting errors can trigger them.
- New disclosure rules require companies to report details about clawbacks. The rules may also affect how companies conduct internal investigations.
Conclusão
Clawback provisions play a significant role in frameworks by reinstating investors' confidence and fostering trust among the public. Their inclusion improves individual accountability and modifies incentive systems to reduce reliance on short-term payout results.
One can say clawbacks are implemented across sectors such as private equity, insurance, dividends, and business contracts to ensure greater responsibility among the parties involved.
However, to ensure a fair application of clawback policies among the sales reps, an incentive automation channel can be established for them to meet the expectations set out in the contract. Compass is a sales incentive management software that helps businesses manage and automate their sales incentive programs fairly. The platform simplifies the management of complex incentive plans by:
- Launching incentive plans
- Calculating and disbursing incentives, with real-time visibility into performance
- Generate commission information and on-time payouts.
- Integration with CRMs through webhooks, APIs, or SDKs, incorporating link and gate filters for managing multiple data sources.
So facilitate the automation of incentive programs, simplify the process of establishing sales performance goals, and monitor employee advancement in surpassing them while maintaining decorum and fairness at all levels with Compass.