What's the difference between a clawback and a true-up, and when does each apply?

Clawback: Company reclaims compensation already paid because of misrepresentation or departure (enforced rarely, legally risky). True-up: Reconciliation of variable comp at EOY when final data differs from paid-through forecast (common, expected, legally safe). Most companies confuse these. Clawbacks are contentious; true-ups are normal. A rep overpaid $15k in Q1 commission on a deal that fell through in Q3 gets true-up (subtract $15k from Q3 or Q4 check). A rep who leaves with unearned draw gets clawback (only if documented). Different animals.

Clawback: When It Applies (Rare Cases)

True-Up: When It Applies (Always Expected)

The Legal Distinction:

Clawback language must be explicit in offer letter or employment agreement. It signals the company can take back compensation. Courts scrutinize these heavily, especially in states like California where compensation is presumed earned once paid. Clawback language that's buried in page 8 of an employment agreement and never enforced won't hold up if you try to enforce it years later.

True-up language is standard in variable comp plans and doesn't require special legal language. It's built into the comp plan: "Commission is paid on revenue recognized by GAAP. If revenue is later reversed or adjusted, commission is adjusted accordingly." This is boilerplate.

Real-World Example:

Rep Alice closes a $300k 3-year contract in February 2026. You pay her $45k commission in March (15% of $300k). In April, the customer requests a refund. You refund the customer (deal voids). Is this a clawback or a true-up?

• If deal void happens in the same calendar year (April) and contract had a 30-day trial/satisfaction guarantee: True-up. You adjust Q1 commission and issue negative Q2 commission check (−$45k) or apply it to future earnings. This is mechanically automatic and expected.
• If rep knew the deal was risky and didn't disclose (fraud): Clawback. You recover the $45k + legal fees. Harder to enforce, but legally clearer.
• If customer is a long-time partner and negotiating renewal terms (no fraud): True-up, not clawback. You reconcile actual revenue vs. forecasted revenue. Reps expect this.

Enforceability Comparison:

Best Practices to Avoid Clawback Litigation:

1. Use true-ups, not clawbacks, for normal revenue adjustments. If deals commonly reverse in your business (trials, refunds), build true-up language into comp plan and reconcile quarterly. Don't label it clawback.
2. Reserve clawbacks for fraud, misconduct, or unearned draws only. These are defensible and rare.
3. Document recoverable draws at hire. "Recoverable draw of $60k applies if you leave within 12 months of full productivity (Month 6+)." Get rep signature.
4. Never retroactively clawback commission already paid and earned. That's a wage violation in most states. Only clawback unearned draws or commission on deals that void within 90 days of close.
5. Communicate true-ups quarterly. Show reps the reconciliation: "$30k forecasted deal in Q1 closed in Q3. We're adjusting Q1 commission down $4.5k, Q3 commission up $4.5k." Transparency prevents shock.

Red Flags:

• Comp plan uses "clawback" language for normal deal voids (should be true-up).
• Company tries to clawback earned commission (legally risky and reputation-killing).
• Clawback language in offer letter but no documentation of recoverable draw terms (unenforceable).
• True-ups applied inconsistently (some reps adjusted, others not; creates HR risk).
• Clawback attempted >12 months after commission paid (courts void these).

TAGS: compensation,clawback,true-up,legal-risk,cro-ops