The Curse of Clawbacks

On Wednesday, February 15th, 2017, I woke to my phone serially buzzing with messages of friends and colleagues bemoaning Oracle’s latest gambit. A class-action lawsuit was filed, claiming that Oracle “retroactively increased quotas or decreased commission rates on past sales in order to pay sales employees less than what their existing compensation plans required.”

Assuming this is true (I will let the lawyers fight it out on that subject), this type of behavior is one of the fastest ways you can destroy trust on your sales team, slow down deal flow, increase turnover among top reps, and as the story gets out – kill your next recruiting class. Further, the entire financial model is now at risk as well – just in an attempt to penalize sales reps for being too successful. 

The Impact on Current Deals

Any sales rep hit with a clawback is not going to dedicate the same amount of time to deal flow. They’re going to start analyzing the impact on their earnings, their goals for the year, and their long-term commitment to the firm.

Commission errors alone can rob you of vital selling time while sales team members spend hours hovering outside of the finance department to argue about their compensation; time they should be spending uncovering new opportunities, moving deals through the pipeline, and negotiating the close. Now, let’s compound that by not making errors, but instead retroactively changing the incentive plan.

So, now, the sales team is building (or updating) their personal “shadow accounting” commission spreadsheets to check the company’s math. Since the company has already shown that the compensation plan itself cannot be trusted, they’re not going to trust the presented number “owed” due to the clawback. That is not where you want reps spending their time. Add in some hours to update their LinkedIn profile while they search for a new job, and you have just lost hours of productivity.

Add all this up, and you have lost at least 15 percent of your rep’s time, which adds up to a measurable impact on FTEs. If you are doing some back-of-the-envelope math – how much did you save in the short-term vs. how much future revenue did you sacrifice while your sales team was preoccupied with the change?

The Impact on Finance

A retroactive clawback of commissions also plays havoc with the commission expense accruals. Under the new revenue recognition rules announced by FASB, companies need to have an accrual model for commissions when they are booking the expense.

A retroactive change is going to impact past accruals made, and will further impact the commission expense forecasting model as well. These models are critical for communicating to the Street about the business, and large-scale changes could create a need to restate earnings.

How is finance supposed to build their accrual and forecasting models for commission expenses when the math behind the model can retroactively change on a whim?

This Should Not Ever Happen

Sales reps take the incentive plan as their map to personal gain, and smart companies must ensure those maps are aligned with corporate goals. Changing the map retroactively destroys their motivation, their activity, and their loyalty. No company can afford to destroy that relationship with their sales team.

Needing to change the plan mid-way, and retroactively, means that the company failed to model out the plan when they built it. Any incentive plan design exercise should include the total cost of all incentives at every level of potential performance, and should come with an agreement by all parties (Sales, Finance, etc.) on the total potential costs.