Designing robust sales commission agreements is the best way to ensure your incentive plans are legally protected. Clear commission agreements minimize legal risk, but also increase productivity. They help ensure your sales team doesn’t spend excessive time arguing about commissions (for example, due to confusion about rewards or eligibility).
In addition, drafting a great commission agreement will help you prepare for unexpected situations such as departures, title changes, sales territory redesign, etc. Finally, creating a clear sales commission agreement is always a wise choice, but it can also be a legal requirement. For example, California’s 2013 law requires all commission agreements to be in writing.
There are three main aspects which need to be considered when designing sales commission agreements. Here is brief overview of key aspects to consider.
1. Terms and Conditions
Your commission agreement should start with a clear description of sales targets and associated rewards (if you need help structuring your commission plan, click here). Some software solutions let you visually design incentive plans and then auto-generate an equivalent text description. Here is a sample automatically generated output (which is just a starting point for clearly describing your plan).
Besides clearly describing incentives, your agreement should include statements such as:
- Plan objective – define why the plan exists and the overall compensation philosophy (ex: we pay for performance not for completing some actions).
- Plan administration – define who is authorized to release payouts, make corrections, revise terms, etc.
- Plan eligibility – define conditions for participants to be eligible (ex: sales interns do not qualify).
- Leaves of absence – define how situations such as an extended sick leave should be handled.
- Recoupment of awards – define how incorrect or over-payment should be handled (including adjustments, draws, clawbacks, etc.).
- Plan acknowledgment – define how participants can review the incentive plan and accept it.
- Hiring & departures – define how special situations such as terminations should be handled.
- Taxes – define responsibilities for paying taxes as well as handling of taxes in commission calculations.
This may seem a bit overwhelming, but once you have it in place, you are good to go – and you only need to do this once. Overall, your best bet is to use a commission management solution. Here is an example of a legal statement builder integrated within a commission management solution:
2. Participant Enrollment
Your commission agreement is worthless unless your participants have read and accepted it. There are few aspects to consider:
- How do you invite participants to enroll in the plan?
- What is the process for participants to enroll in the plan?
- Do you want to request electronic signatures vs. checkbox-type acceptances?
- How can you review who has accepted the plan vs. is still pending?
- How can you retrieve proof of acceptance for given participants?
- How do you prevent participants who have not enrolled from receiving rewards?
You can of course manage this manually, or you can automate the entire process using a commission management solution.
3. Legal Gotchas
Legislation regulating commissions varies from state to state. For example, under New York law, there is a one month limit between the time a commission was earned, and the time it must be paid (this only applies to certain classes of sales representatives however).
Similarly, New York law restricts recoupment of awards unless it is a deduction benefiting the employee. In most cases, any reasonable agreement you’ve designed should not conflict with state requirements because they tend to be reasonable and make sense.
For example, trying to add a provision stating that commissions will not be paid out to any departing employees is likely to conflict with state legislation. But you already know that the right thing to do is to pay the commission and move on. In all cases, having your legal team review your pre-drafted commission agreement is always an excellent idea.
So what’s the secret behind designing a robust sales agreement?
- A well-designed commission structure – learn more here.
- A clear statement explaining rewards and conditions for obtaining those rewards
- A comprehensive set of conditions which do not conflict with state regulations
- A way to automate enrollment and acceptance