No one likes making a loss, especially when they’re contributing to the financial stability of a company. In the life of a Finance leader, understanding when you overpay your sales team (overpayment) and the following course correction (clawback) needed can spiral into a make or break moment way too often. Mistakes are unintentional but they can have consequences that can severely affect the health of the company.
Sales teams are one of the most talented folks that push the companies to reach their vision. With the breakneck pace with which companies keep moving ahead in their journey to outpace each other, it’s important to retain the best of talent. An incorrect CRM entry can have a ripple effect across different departments like the sales payout, directly forcing the RevOps teams to manually verify the payout, and overload the finance team by making them responsible for executing the payroll. As a finance leader, it becomes your responsibility to ensure no disruptions in the process considering erosion of trust between departments.
In this blog, we underline the heavy costs associated with commission overpayments, the subsequent clawback provision, and the importance of providing accessible transparency in commission structure.
While you may not like it when your sales reps charge you at the end of every month, asking you to explain how their commissions are calculated, you can’t blame them. Not only are commission structures complex, they’re also not transparent enough for your reps to grasp clearly, leading to companies overpaying or underpaying.
Here are the two main reasons behind overpayments in sales commissions.
Manual errors are one of the most common causes of sales commission overpayments. This is because the calculation of commissions can be complex and time-consuming. Mistakes creep in when there’s one master spreadsheet for sales commission computation that then needs to be split into multiple spreadsheets for each rep with his/her unique comp plan structure.
And then, these multiple spreadsheets need to be further distributed confidentially to each rep and their respective manager. Therefore, for reasons more than one, spreadsheets are just not the answer for sales commission management.
For example, a sales rep may be mistakenly credited with a sale for which the commission rate was calculated incorrectly because of later conversations they had with the account executives. The contract the sales rep went with, and the contract that the client signed up for can be drastically different in specific cases. There can be different interpretations of saas sales commission percentage, when it plays into a sales strategy.
A manual effort to calculate the right numbers when done on a larger scale individually to every sales rep, can cause disruptions on a much larger scale. The errors can occur when there are changes to a company's commission plan or when there are errors in the contract data as well. For example, if a company changes its commission plan to include a new tier of bonuses, it is possible that some sales reps may be credited with money they haven’t earned yet.
Similarly, there can be a complete mismatch between the way the finance team looks at it against the way sales team leaders look at it. If there are errors in the contract data, it is possible that the wrong amount of revenue will be recognized, which could lead to overpayments.
Spreadsheets are not designed to handle the complex calculations required for sales commission, and they can be easily corrupted. This can lead to inaccurate payouts, which can damage morale and productivity. A sales commission software solution is designed to handle complex SaaS scenarios, right from tracking sales activity to calculating payouts.
Being one of the most customizable tools to use, Excel and Google Sheets are an accepted norm for companies in the beginning of their journey. When the company starts growing, within the functions it serves and in separate directions, the customizable ease of use of sheets can spiral and become a limiting factor in the way they operate.
ASC 606 revenue recognition regulations came into effect in 2018. Ever since it came into action, it has changed how sales commission is calculated by prioritizing transparency in the process. The recognition standard is one of the biggest reasons why spreadsheets fail in a scaling organization.
Does a spreadsheet do what ASC606 compliance needs? That’s the question to answer. In a company that’s growing exponentially, the operational overload can be a huge factor in pulling several departments down. By investing in a sales incentive software, you solve disputes before they happen by providing everyone the clarity they need.
The fastest way for a CFO to deal with conflict about commission is to limit the interaction and pay the sales rep of the figure they’ve calculated and come up with. It’s the fastest way, but at a cost that’s highly unsustainable. This way of going about things handles the conflict at an individual level instead of providing visibility to everyone involved over how revenue looks in real time. The costs that the company bears from this are often astronomical on a macro level. A few of them are:
Arising from delays and inaccuracies in payments, the teams across the board will have a lot of internal disputes emerging from the confusion. Sales team’s bandwidth starts taking a hit because they need to keep raising tickets to the finance team to get the confusion cleared on their commission structure. After which the operations teams will need to deviate from their responsibilities and look into what’s causing the issues and what are the immediate fixes, time and again.
A repeating cycle of frustration can severely demotivate people that are working to move the needle. When the business they create by doing the groundwork doesn’t repay them through the compensation they deserve, it breeds confusion on where their efforts lie and how they should approach the next quarter, and where they should even invest their time.
Compensation is the best form of feedback for your sales reps.
- Sameer Sinha, Co-Founder & CEO at Visdum
Motivation does wonders to what your salesperson can do. But how does restricting revenue visibility affect the people involved? It takes a lot out of your teams to have your back when you aren’t staying consistent on the payouts. When there’s an overpayment and a mistake from your end, it also means you’ve given money that you need to retrieve from the sales team. At an individual and emotional level, you’re not taking the money you’ve given them by mistake but you’re taking the happiness of seeing a bigger paycheck away from them.
This grim situation often leads to salespeople jumping ship to a different organization to find a commission management system that rewards them better. The loss of motivation becomes eminent when the sales targets need to be readjusted for your commission plan to kick in the way it needs, and that loses the focus of having a target and a strategy in the first place.
Understand there are things that you can do to re-correct the course but there needs to be a method to limit the damage.
Here’s what Sameer Sinha, a veteran sales leader and Co-Founder & CEO of Visdum suggests:
Check and recheck all the calculations in the process to make sure you don’t start a conversation without having a reason behind it.
Here are 4 things to ensure there’s no friction between two different teams:
Transparency is ideal when dealing with human mistakes. With the right details and the right method in place, accept responsibility and then take a stake of the situation.
The following would be Sameer's rules to follow:
As mentioned above, there is a chance that you lose out on some of your brightest potential because of an error, especially when it repeats itself.
Enjoyed reading so far? If this section has been helpful to you, you can’t miss out on this.
A clawback in sales commission is a provision allowing employers to reclaim overpaid commissions due to errors, policy violations, or changes in the customer's status. It serves as a corrective mechanism to rectify overpayments and maintain fairness in sales compensation practices.
When a clawback applies to a sales representative, the employer recoups overpaid commissions, typically deducting the excess amount from future earnings. Clawbacks serve as corrective measures, ensuring fairness and accuracy in sales compensation while addressing errors, policy violations, or changes in customer status that led to overpayments.
Yes, a company can take back commission through a clawback provision. This allows employers to reclaim overpaid commissions due to errors, policy violations, or changes in customer status. Clawbacks serve as a corrective mechanism to rectify overpayments and maintain fairness in sales compensation practices.
Yes, clawback clauses are legal and common in employment contracts. They provide a mechanism for employers to reclaim overpaid commissions due to errors, policy violations, or changes in customer status. The legality often depends on the jurisdiction and the specific terms outlined in the employment agreement.
An example of a commission clawback clause may stipulate that if a customer cancels a contract within a specified timeframe, the sales representative must reimburse a portion of the earned commission. This ensures that commissions align with the long-term value and retention of acquired customers.
The clawback rule is a provision in contracts allowing employers to reclaim overpaid compensation, such as commissions, due to errors, policy violations, or changes in circumstances. It serves as a corrective mechanism, ensuring fairness and accuracy in compensation practices.
The maximum clawback, or the percentage of overpaid commission that can be reclaimed, varies based on company policies and contractual agreements. It is typically defined in employment contracts or sales compensation plans, outlining the conditions and limits under which clawbacks can be applied.
To stop a clawback, address the root cause by rectifying errors, adhering to policies, or preventing customer cancellations. Communicate with the employer to resolve disputes or negotiate alternative arrangements. Proactive compliance and clear communication can help prevent the need for clawbacks in sales compensation.