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Diana Ceballos 04.01.2022 6 min read

What is a sales commission agreement?

It’s the success of the sales department that helps a company rake in the money. Were the company a train, then the sales department would verily be its engine and the sales professionals its fuel.

For a company to thrive, the bond between the professionals and the sales department should be strong. And without a doubt, a transparent sales commission agreement is the adhesive that binds these two elements together.

A sales commission agreement is inked between the seller (the company) and the sales representative to regulate the amount the former would pay to the latter as fixed income and, more importantly, commissions. This commission depends on the value of the sale, the number of sales, the percentage agreed, bonuses, etc. The agreement also chalks out the mode and date of payouts with the applicable ceiling or floor limits. 

This detailed agreement helps the sales reps understand their role, limits, and potential rewards better. It is important to get the sales commission agreement right to avoid future conflicts. Let’s get a lowdown on the key points for creating a clear, fair, and legally enforceable compensation plan.



Key elements of a sales commission agreement


Providing Authorization

Sales representatives should have the go-ahead of the company to sell its products. The company can include clauses to prevent the sales rep from selling outside a particular region or target audience.

Agreement on Tools

To help maintain transparency, the sales rep should agree to use CRM tools provided by the company.

 

Non-Disclosure Clause

Access to company products, data, and other confidential information gives the sales rep in-depth knowledge. The agreement should install a barrier against their selling or sharing this information.


Commission Structure

A clear and easy-to-understand section on how the commission will be calculated and the different aspects of the commission (draw, bonus, commission, incentives, etc.,).


Terms of Termination

If either of the parties wants to terminate the agreement, elements like notice period, severance packages, etc. should be spelled out.


Signature

The agreement needs to be signed by all parties involved. 



Basics of a Comprehensive Sales Commission Agreement: 

 

1. Expand the relationship

Your sales agreement should explicitly mention the kind of professional relationship the company has with the sales rep. An independent contractor, a freelancer, and an employee warrant different commission agreements. This is important not only from the tax perspective, but also to ensure you hold the rights.


2. Keep it simple, but don’t miss out on details

The devil is in the details. In sales, where compensation plays a big part, the details need to be perfect. Nitty-gritty like time and mode of payment, refund process, commission alteration process, commission calculation methods, incentives and bonuses, and termination details need to be clear and concise.


3. Consider the exceptions

There are quite a few what-ifs and why-nots when it comes to sales. In big deals, the terms can get murky if the contract is ambiguous. Clearly defining as many extraordinary incidents as possible, such as long leaves, customer complaints, split earnings, and clawbacks, helps avoid tussles.


4. Different kinds of agreements

According to Hubspot, there are ten types of sales commission agreements: 

  • Base salary + commission
  • Straight commission
  • Relative commission
  • Absolute commission
  • Straight-line commission
  • Tiered commission
  • Territory volume commission
  • Recoverable draw against commission
  • Non-recoverable draw against commission
  • Residual commission

 

Manage every single process with ease-of-use while adjusting and designing effective commission plans

 

With different types of commissions and elements to account for, it helps to have an effective and functional commission tracking software. Blitz’s commission management platform helps to automate payouts while delivering seamless collaboration, better performance, and increasing productivity across multiple departments. 

Contact us today for a demo and free your company from the burden of manual commission management.