A sales commission agreement is a document that outlines the details, terms, and conditions of the arrangement between a salesperson and a company to sell its product. The agreement will state what the salesperson’s responsibilities are and how much money he will receive in the form of a commission.
The agreement allows both parties to lay out all of the terms of the arrangement in writing so there is no confusion about when, how, or under what circumstances a salesperson will receive his commission. It also protects both parties in case there is any dispute about who should have received money for a sale.
The company can use this agreement for any salesperson that works with them, including commissioned individuals, independent contractors, or representatives from another company. The agreement typically covers three key elements: the commission rate, methods of calculating commission and Restrictions on earning commissions.
The commission rates
The commission rate clause sets forth the rate at which the sales representative will earn commissions on all sales. This can be stated as a flat percentage, such as a per cent, or it may be stated as a percentage that increases based upon a certain number of sales achieved by the representative.
Example of a commission clause:
(a) The Commission Rate for the sale of Company’s Services shall be [X]% of Gross Revenues from each such sale. For purposes hereof, “Services” shall mean [DESCRIPTION OF SERVICES].
(b) The Commission Rate is subject to change by Company upon [NUMBER] days prior written notice to the Representative.
Methods of calculating commission
There are a few different ways that commissions can be calculated in a Sales Commission Agreement. The method you choose will depend on how your salesperson works, how much he sells, and how you want to structure his incentives.
Here are some common methods of calculating commission in a Sales Commission Agreement:
Flat Rate. This is the simplest form of commission, where the salesperson is paid a flat fee per sale. This is often used for door-to-door salespeople or people who are paid by the hour or salary while making a small commission on top of that income.
Percentage of Sale. This is the classic form of commission, where the person’s pay is based on a percentage of what they sell. They may be paid a different percentage depending on the product sold or their role in the sale.
Tiered Percentage. A tiered percentage structure incentivizes individuals to work harder because each sale has an increasingly larger per cent reward attached to it. For instance, an individual may earn 10% on their first ten sales, then 15% on their second 10 sales, and then 20% on all subsequent sales.
Restrictions on earning commissions
the agreement should state certain restrictions on when and how a salesperson can earn his commission. These restrictions may include:
The salesperson must serve a probationary period;
He must sell products only to customers located within specific regions;
He must sell products only through certain channels;
He must not sell similar products to that he promotes; and
He may sell products only within certain industries or sectors.
In addition to these three elements, the sales commission agreement should also contain an effective date and an expiration date. An example of this is: “This agreement shall commence on January 1, 20….and shall expire on December 31, 20……”
Other provisions may also be included in a sales commission agreement. For example, some agreements include a non-solicitation clause that prevents the sales representative from taking away customers when the relationship with the Company ends. Another provision that may be included is confidentiality, which requires the sales representative to keep all trade secrets confidential after the termination of the relationship with the business.
The great thing about a well-drafted Sales Commission Agreement is that it doesn’t have to be complicated, as long as you don’t try to over-complicate the agreement. It is just as simple as forming a mutual understanding with your salesperson that what has been promised will be delivered.
A well-drafted Sales Commission Agreement doesn’t just protect your business against a drop in revenue; it also provides payments for your salesperson during working times and protects both parties from losing sales and income in the case of his termination.
If you are interested in drafting a robust agreement for your business or would like to learn more about our services, please get in touch with us at your convenience.