Sales Commission Agreements

Steven Cesare, Ph.D.

A business owner from Minnesota contacted me the other day to discuss a proposed compensation plan for the company salesperson. During the discussion, I asked for specifics about the salesperson’s performance expectations, goals, and compensation features from the owner. Humbly, the owner admitted he did not have answers to my inquiries because he thought the only thing that was important was the commission schedule. He had not considered a systematic framework to address the myriad issues that are at stake when dealing with salespeople. To that end, I strongly suggested that he and I work on drafting a Sales Commission Agreement to formalize the company’s position relative to the salesperson and for legal defensibility should potential misinterpretation between the owner and the salesperson present itself.

I proposed the following topics that should be included in every Sales Commission Agreement.

Confidential Disclosure: Statement reminding the salesperson that all pertinent information related to this agreement shall be treated as confidential and proprietary to the employer.
Scope: Basic statement regarding at-will policy, no ancillary promises or inducements, brand image, legal requirements per state law, acknowledgment of roles and responsibilities, etc.
Term of Agreement: This document is optimally crafted, signed, and revised annually to align with changing business goals and related performance expectations.
Limitation of Representative’s Authority: Statement specifying the salesperson’s focus (e.g., maintenance contracts, design-build projects, and snow contracts, but not enhancements or tree work).
Indemnification: Statement that salesperson agrees to hold the employer free and harmless from all claims for damages and injury while performing sales services for the company.
Technical Qualifications: Statement that salesperson acknowledges possession of requisite professional skills to perform at a satisfactory level while in position.
Base Compensation and Expenses: This section stipulates the salesperson’s bi/weekly salary as well as the related expenses that shall be reimbursed to the salesperson by the company.
Commission Terms: Defines the exact commission rates for all sales made during the Agreement Year delineated by service type (e.g., design-build, maintenance, snow, trees).
Sales Quota: Identifies the exact goal threshold for each sales category in order to receive a commission payment. For example, $400,000 in new annual maintenance contract work at 45% gross margin; $300,000 in new annual snow revenue contracts at 65% gross margin.
Bonus Terms: As needed, this section specifies extra compensation for exceeding stated sales goals.
Involvement in Proposal Determination: Clarifies the degree of functionality the salesperson must demonstrate (e.g., must solely develop, submit, and present the formal proposal to the prospective customer) in order to qualify as a commission-eligible sale.
Performance Expectations: Identifies performance standards (e.g., submit three proposals weekly, five cold calls daily, one lunch-and-learn monthly, develop an annual sales calendar) that will likely lead to sales achievement.
Time of Payment: Stipulates the timeframe that commission and/or bonus payments will be made.
Account Maintenance: Specifies that salesperson will conduct customer follow-up after the new contract has begun (e.g., 30 days, 90 days, 180 days).
Expense Reports: Details and timeframes associated with approved business expense paperwork.
Termination: Restates at-will agreement and clarifies status of commission-eligible proposals at the time the employee ceases to work with the employer.