Case Study: Lessening the Effects of Clawbacks

As an SPM consulting firm, one of our priorities is ensuring that our clients have accurate and balanced commission payouts. We work within their business models to eliminate any payout constraints.

When our client wanted to limit the impact of clawbacks on its sales force, their teams worked closely with our team of compensation experts to find a solution that best fit their needs.

A clawback affects payouts to a sales force by retroactively taking funds from a sales representative’s commissions. This can be the result of a large rebate going back to the client, a low-performing month, or other dips into payment funds.

Not surprisingly, clawbacks can have a negative impact on sales force morale. Sometimes, clawbacks can prevent sales reps from receiving commissions at all.

Our commissions team worked closely with the client to mitigate the effects of clawbacks and make sure that their sales force would receive accurate comClawbackmission payouts. After our experts gathered the data they needed, they walked through multiple alternatives in order to craft a solution that fit the client’s needs.

Alternatives:

The first alternative that the Canidium team considered was a rolling commission average, in which commissions can be “smoothed out” by averaging payouts over a longer period of time in order to lessen the drastic falls. However, this solution often did not re-collect overpayments in a timely manner.

Our team also explored manual adjustments, in which payments are manually entered into the compensation tool to offset the negative effects of the clawbacks. This was ultimately rejected because of the level of recurring effort required to re-calculate payouts, the increased risk of human error and the need to track accounting outside of the commissions software solution.

Proposed Solution:

After weighing all the options with our experts and the client’s commission and finance teams, they decided that they wanted to make sure their sales representatives received a bonus check for their efforts and still allow for overpayments to be collected, regardless of any clawback variables.

Our compensation experts then worked to craft the logic for a “clawback spread,” which divides the clawback evenly over each month of the quarter and reclaims overpaid dollars at a slower rate, resulting in less drastic variations in each payout.

In the clawback spread model, clawbacks are calculated in the last month of each quarter and do not affect the commission period in which they are calculated. Instead, the balance is carried to the following period and spread equally in three installments throughout the following quarter.

With this distribution, each sales rep can still pay off the full balance within one quarter while simultaneously maintaining quarterly earnings. If the full clawback balance has not been collected during this period, it is rolled into the following quarter, along with any additional eligible clawback value.

Our compensation team also added the ability to supply automated or manual transactions to the system which directly adjust the clawback balance positively or negatively, allowing the business to have flexibility in forgiving or reinstating clawbacks during any period in the payment cycle.

This solution was chosen because it overcomes all the variables posed within the alternative solutions previously explored. For example:

  • Prior to the solution: A clawback balance of $3,000 at the beginning of a quarter would wipe out earnings of $2,500 within a single month.
  • After the solution: Two examples:

Example 1

    • A clawback balance of $3,000 at the beginning of a quarter would generate three $1000 installments to be recollected discretely from each period of the quarter.  A $2,500 earning would only be reduced by the $1,000 installment, which leaves $1,500 for the sales rep for the month.

Example 2

    • The first period of the quarter, a $1,000 installment would use up all of the $900 earning and leave a $100 remainder to be paid in the next month.
    • The new balance would be $2,100 and in the second period of the quarter, the installment value would be $1,050. (the $100 remainder from the 1st quarter was distributed 50/50 to each of the remaining quarters)

NOTE: In the second example, the rep did not avoid having a zero-dollar commission in the first period of the quarter, but there is still the possibility that they could have a commission in the third month of the quarter.

Recommendations:

Once our team worked through the clawback spread solution, they presented it to the client’s commissions and finance teams for review and refinement. Upon approval, it was implemented with 23 commission plans and tested using historical data copied from the production environment as well as test data for the proposed future periods.

Analyses are completed regularly to verify that clawback balances are being re-collected accurately (according to financial projections) and that payouts are remaining consistent in frequency.

Is your business facing a similar commissions challenge? Meet with our experts to see if this solution could benefit your sales force!