Tag Archives: Charge backs

Are claw backs legal when the account is past due?

Question and answer format

Question

Our small sales team is paid 100% commission on gross margin. Sometimes, we claw back commissions that were paid after the customer is past due and in collections, is this legal?

Answer

I won’t venture a legal opinion here — and believe it is likely to vary from state to state. However, I will assure you that it is common practice to recover commissions paid in cases in which the company is not paid. To be sure you’re covered legally, and that everyone knows what to expect, you would do well to document your intention to do that in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you’ll be all set.

Reducing sales compensation for bad debt

Question and answer format

Question

How do most companies handle sales compensation when there is a write-off for bad debt. Do they charge them back on the cost the company is out, or the gross profit they would have made if the customer paid?

Answer

Most of our clients do charge back the sales credit for deals (or portions of deals) that are written off for bad debt. If you are paying based on the sales value, then the sales value is what would normally be reversed. If you are giving sales credit and paying based on deal margin, then the margin value of the deal that was originally credited (or an appropriate fraction of it if the write-off is partial) is what is reversed out of sales credit. The tricky part is whether you reverse either (1) the compensation that was earned on that deal at the time it was credited, or (2) the sales credit for that deal so that it reduces compensation in the measurement period in which the credit is reversed. The right answer to which of these to implement would be based on the detailed mechanics of your compensation plan.

An account may become past due after commissions are paid. What are the options?

Sometimes customers return products, or they just don’t pay. As a result, some companies do a charge back on commissions paid to the sales person on the sale. The legality of this practice can vary from state to state. However, it is common practice to recover commissions paid in cases in which the company is not paid.

To be sure you’re covered legally, and that everyone knows what to expect, you would do well to document your intention to charge back commissions in case of returns or non-payment in your compensation plan document. Your plan document should also cover how you intend to handle leaves of absence, terminations, and claim the right for management to change the compensation plan at their sole discretion. Once you have that document in place, have a local lawyer review it, and you’ll be all set.