Dear SaaSt: Do sales commission clawbacks typically apply after a customer’s payment has cleared (e.g. if they ask for and are granted a refund) or only up until payment is collected?
Ah, clawbacks. This is an issue that will worry you a lot in the early days — and that later, at least help make sure sales doesn’t pursue churn-and-burn deals too aggressively.
But in the end, clawbacks don’t really matter.
Some customers won’t end up paying — but not that many. Yes, you can and should clawback the sales commission on those deals. But it won’t really matter. Because this isn’t very common. Customers rarely go through all the steps of a sales process, deploy a product into production — and then don’t pay. Because you can always just turn off the product …
And if you pay sales reps a full annualized commission on monthly/quarterly deals, some deals won’t last a year or longer, and you may want to clawback part of that commission. You probably should. But it won’t amount to all that much in most cases.
Clawbacks usually end up being relatively trivial in size and relevance to the org. Put them in your comp plan so you can rest easy that everyone is being treated fairly and incentives are aligned with your sales team.
And the first time a medium-size customer doesn’t pay, it will create stress with the rep, probably their boss, finance, etc.
But if 1%-2% of your revenue is “clawed back” it won’t matter. Just take a small reserve and move on.
Where clawbacks and such do get material is if you pay reps a full commission on deals that are really a 30–60–90 day proof-of-concept or trial. Just don’t do it. A far higher percent of POCs and trials may well not convert to long-term customers. Enough at least to be material. Most companies don’t pay the total commissions unless these deals convert to full contracts.
However, I did once I saw our pilot conversion rate was very high. In the end, almost all of our trials converted, and as long as the trial was an “opt out” vs. “opt in”, I paid the full commission upfront. A critical difference in mentality, and in the end, customer behavior as well.
(an updated SaaStr Classic answer)