How to Write a Sales Commission Agreement

Sales commission agreements are essential documents for salespeople and their companies, clearly outlining their commission structure when they close a successful deal. If no such agreement is in place, you run the risk of disputes arising from increased frustration and a lack of motivation and productivity from sales staff. In this article, we’ll explore key elements of sales commission agreements, including the different types, why they’re important, and what exactly they should include.

 

What is a sales commission agreement?

A sales commission agreement is a formal contract between a company and a sales representative that outlines the terms of a commission-based compensation plan. It defines essential details such as commission calculation methods, payment schedules, and any conditions that must be met for commissions to be earned.

A sales commission agreement is a contract between a company and its employee that defines the terms of the commission-based payment structure when the employee makes a sale. This includes how the company calculates the commission and any conditions the employee must meet to earn it. These agreements establish a clear and positive relationship between the business and its sales team, as they can agree on targets, responsibilities, expectations, and rewards.

Download our sales commission agreement template

 

What are the different types of sales commission agreements?

There are multiple different types of sales commission agreements, each one serving different requirements:

• Employee commission agreements – these agreements are used for salaried employees who earn commission on top of their base wage. Providing greater clarity for sales teams through employee commission agreements can encourage reps to be more motivated when meeting targets.
• Individual contractor commission agreements – this type of agreement is designed for independent contractors whose payouts are just based on commission. It is typically used when an independent contractor’s income is entirely dependent on commission earnings from their performance in sales.
• One-time and recurring commission agreements – one-time agreements are used when commission payments are made for each sale. Recurring agreements provide regular commissions for repeat business or subscription-based sales, offering ongoing incentives for sustaining customer relationships.

 

Why are sales commission agreements important?

Sales commission agreements are essential because they align the sales team’s efforts with the company’s overall objectives while providing a clear incentive for high performance. Establishing a well-defined commission structure helps to:

• Reduce disputes and misunderstandings over commission payments
• Ensure fair and transparent compensation based on sales achievements
• Motivate sales representatives to meet and surpass their targets
• Improve performance tracking and management efficiency
• Offer a legal framework that safeguards both the business and its sales team

By clearly outlining expectations and rewards, these agreements promote a productive and goal-driven sales environment.

 

When are sales commission agreements used?

There can be a wide range of use cases for sales commission agreements, including the situations below:

• Launching new products or services – when introducing new offerings, a business may use sales commission agreements to incentivise its sales team to focus on effective promotion of the new products or services.
• Amending sales strategies or targets – if an organisation changes its sales strategies or targets, it may provide updated sales agreements or updates to employment contracts, ensuring new expectations are made clear.
• Hiring new sales staff – when onboarding new sales employees, a commission agreement can often be used to define how the commission structure works, setting expectations from the start of their employment.
• Partnerships and resellers – for arrangements with third-party partners or resellers, sales commission agreements outline how commissions are to be shared and the conditions required to earn them.
• Sales promotions or campaigns – temporary commission agreements may be implemented during specific sales promotions or campaigns to motivate the sales team to meet short-term objectives.

 

What should a sales commission agreement include?

There are several key elements that a sales commission should include to maintain fairness, transparency, and legality:

Party and agreement details

It’s essential that the agreement include correct details for both the company and sales representative, such as their names and addresses, job roles and obligations. The date of when the agreement comes into effect and its duration for when the commission terms are applicable are also important to have in the agreement.

Commission framework and policy

The company should clearly establish how commissions are calculated, e.g., fixed payouts, percentage-based rates, or tiered structures that are directly linked to sales performance. This section should also cover how commissions will be handled in the event of contract termination, including final payout terms and conditions.

Payment terms and criteria for commission

The agreement should detail how often and the method of commission payments, plus any relevant deductions or adjustments. Sales staff should be made aware of what counts as an eligible sale, including restrictions or conditions that stop them from earning a commission. This includes expected sales targets, minimum quotas, and any consequences for not meeting performance standards.

Non-disclosure, non-compete, and termination conditions

To protect the business, the agreement should limit the disclosure of sensitive company information and include a non-compete clause to prevent representatives from working with competitors for a specific period. As the agreement comes to an end, prior to the signature section, it should confirm the conditions under which either party can end the agreement along with any required notice periods.

 

Benefits of a sales commission agreement

Sales commission agreements are beneficial contracts to have in place that protect both businesses and sales teams, ensuring positive working partnerships are maintained.

Clarity of expectations for all parties

A commission agreement helps to clearly define the roles and responsibilities of both the employer and employee, minimising any chances of confusion. It ensures both parties know exactly what is expected from them, preventing misunderstandings.

Boosts motivation for sales teams

Such agreements serve as powerful motivators, encouraging sales reps to ramp up their efforts and achieve higher sales. When there is a clear link between performance and commission earnings, employees are more inclined to close additional deals and surpass their goals.

Legal safeguards for both parties

A carefully crafted sales commission agreement offers legal protection for both the business and the sales team. By outlining the commission structure and responsibilities, it helps minimise the risk of disputes or disagreements.

Transparent and well-defined process

A solid commission agreement ensures a structured and clear payment process. This transparency builds trust between the sales team and management. As everyone will understand how commissions are determined and when they will be paid.

 

How to use a sales commission agreement effectively

Clearly establish commission structure

Sales teams should understand exactly how their commission works and how it is calculated, including the system it will use. Also, they should know when and how the commission will be paid, if it’s monthly, quarterly, or on a per-sale basis, for example. This ensures sales staff understand the financial benefit of their performance, keeping them motivated to continue closing deals successfully.

Set realistic and achievable targets

Sales targets can make or break a salesperson’s commission. Setting realistic sales goals that will challenge staff but not be impossible to reach is the best approach to promote long-term success and commitment. Targets don’t have to be static, they may be changed based on shifts in the market or individual performance, ensuring greater flexibility and opportunity for achieving commission.

Outline job roles

As a company, it’s essential to define the roles and responsibilities of sales reps to ensure clear understanding and accountability. This includes establishing how success will be measured to encourage better productivity and support sales teams to grow in their careers.

Encourage regular communication and feedback

Open communication between the sales team and business is important to maintain positive growth and performance in closing deals. Regular updates and feedback from both sides will help to keep the sales pipeline on track and commission earnings high for staff.

Use the right technology for sales tracking and management

An interconnected ecosystem of digital tools is the way forward in the modern business landscape. As well as a quality CRM to track sales activity and manage commission payments, sales teams can also use e-signature systems like E-Sign to ensure deals and contracts get signed off quickly and efficiently, without unnecessary delays, errors, or time-consuming admin.

Provide ongoing training and development

Sales teams should have thorough introduction and ongoing training when part of an organisation. Refreshing their knowledge and skills with new training techniques ensures that staff stay ahead of the competition and are well prepared to close high value deals continually.

 

Conclusion

A sales commission agreement is a valuable document for many organisations that are looking to encourage high performance from their sales reps. Having the knowledge and tips in this guide for how to write a sales commission agreement will help protect your business and employees and promote positive working relationships that benefit both parties. 

E-Sign has a wide collection of document templates to support businesses with their document needs including a sales commission agreement template. This template will help you save time and resources by not having to create a new agreement from scratch each time you need to establish a commission structure with an employee. Download our sales commission agreement template here to get started. 

Additionally, if you’re looking for a secure and cost-effective electronic signature solution for your organisation, contact us today to discuss your requirements. You can also get started with E-Sign by registering for our 14-day free trial.