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Incentivizing Sales Performance? Use a Commission Agreement.

Updated: Apr 2, 2021

Many organization seek to incentivize their sales and procurement teams by offering a commission on new contracts. Those doing so should ensure that they have a formal 'Commission Incentive Agreement' in place to ensure a clear understanding of the terms, and to avoid unexpected payouts and litigation.

Below are some essential terms for your next Commission Incentive Agreement:

1. Sales Authorization

This section expressly authorizes the sales rep to sell goods and services on behalf of the organization. This section should also be used to place restrictions or guidelines, such as geographic limitations, reserving the right to approve contract pricing, and requiring the sales rep to only use authorized marketing materials.

2. Commission Calculation & Payment Structure

Arguably the most important clause, this section outlines how the commission will be calculated, and when it will be paid. Special care should be taken to define key terms such as "New Contract" and "Net Profit".

For example, if a sales rep earns commissions only on "new" contracts, the definition should expressly exclude contract expansions, extensions, renewals, and successful recompetes.

Additionally, if the commission is to be calculated based on "net profit", deductions from revenue should be expressly defined (e.g. labors expenses, costs of goods/services, other direct costs, discounts, fees, credits, penalties, fines, amortization, depreciation, taxes, and interest).

3. Term & Termination

The commission agreement should expressly state when the agreement will begin, when it will end, and how various circumstances may affect payment of the commission, including:

  • if the sales rep resigns, is terminated for cause, or breaches the agreement; and

  • if the customer terminates the 'New Contract' before the completion of the term.

4. Prohibitive Clauses

Although these obligations may exist elsewhere in the relationship (such as in an employment agreement, NDA, or independent contractor agreement), it is important to ensure that the sales rep is somewhere bound to the following prohibitive obligations (and that these obligations survive termination):

  • Confidentiality (that survives termination);

  • Non-Solicitation;

  • Non-Compete; and

  • Non-Disparagement.

These terms should be carefully and specifically crafted to ensure that they are not voided for legal or public policy reasons.

For example: the non-compete obligations should be expressly limited to the minimum duration and geographic scope necessary to protect the secrecy and confidentiality of confidential, proprietary, and sensitive information, and trade secrets.

Having a commission or incentive plan in place without a formal agreement can lead to unnecessary disputes, costly payouts, and stressful litigation. Avoid these headaches with a formal agreement drafted specifically for your organization.

Need a Commission Incentive Agreement? Contact Out-House Attorneys today to get a customized and affordable agreement prepared specifically for you.

The information provided on this website does not, and is not intended to, constitute legal advice. Instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.

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