Clawback

Clawback, refund of previously paid commission

Clawback is a term increasingly used in the context of commission and bonus schemes. In short, it is about the reimbursement of previously paid commissions, typically in cases where a customer churner (terminates its subscription or contract), or when a trade otherwise falls away. Clawback ensures that the company does not pay for results that do not create lasting value.

What is a clawback?

A clawback means an employee - most often a salesperson - has to repay part of his already paid commission if the underlying transaction fails to meet the agreed terms. For example, it can be:

• A customer cancels their subscription shortly after onboarding.
• A contract is canceled because the customer regrets.
• The payment from the customer is not paid.

The purpose is to protect the company from paying out rewards for sales that do not actually generate revenue.

Why is clawback important?

Clawback is particularly relevant in industries with subscription stores where Customer Life Time Value (CLV) is crucial. If a customer drops out after a few months, the commission to the seller can exceed the earnings the company actually gets. Clawback therefore acts as an insurance that ensures better alignment between company revenue and employee rewards.

At the same time, clawback can create a healthier incentive: Salespeople are motivated not only to close deals quickly, but also to ensure quality, good customer relationships and long-term retention.

Types of clawback

There are several ways to structure clawback:

1. Time-based clawback — commission may be claimed back if the customer churns within a set period (e.g. 3, 6 or 12 months).
2. Pro rate clawback — here only part of the commission is repaid depending on how long the client has been active. The longer the customer relationship lasts, the less clawback.
3. Condition-based clawback — used when certain KPIs or milestones are not achieved, e.g. the customer does not complete an agreed minimum turnover.

Challenges and Best Practice

Clawback can create transparency and protect the company, but it can also be perceived as unfair by employees if the model is not clear and easy to understand. Complexity and lack of transparency are the biggest pitfalls.

The best practice is that:

• Define clear rules for when clawback is triggered.
• Communicate openly so that employees understand both the logic and the conditions.
• Use digital systems that can calculate the clawback in real time and thus avoid doubts or manual errors.

Clawback is a key tool in modern commission structures. It protects the company from losses on churn and creates an incentive to focus on lasting customer relationships rather than short-term sales. When clawback is handled transparently, consistently and supported by technology, it becomes a valuable mechanism that strengthens both the finances and the motivation of the sales organization.