Sales Compensation Plan – Terms and Conditions

Most sales reps and managers focus on the commissions section of the sales compensation plan.  This is where your sales rep figures out how much he or she can make – “if I sell x dollars of revenue, I’ll make y dollars in commissions.” It’s equally important to understand the terms and conditions section of the plan which dictates how and when commissions are paid.

This section provides management with the tools it needs to administer the sales compensation plan while protecting your company’s interests.  Let’s look at some of the key terms and conditions that I include when writing sales compensation plans.

Commission Earned – This defines the point at which you recognize that commissions are earned – between when the sales rep completes his work and when your company is assured the sale will close and revenue will be collected.  Trigger points can be:

  • Receipt of purchase order
  • Installation or delivery of product
  • Invoice to customer
  • Receipt of payment from customer

Commission Paid – Commissions are paid days or weeks after the commissions are earned.  This time lag allows your company to prepare commission statements and checks on a regular cycle.  It also offers additional confidence that customers will not cancel the sales on which commissions are paid.  Commission payment cycles usually fall at the end of the month or quarter in which the commissions are earned or sometimes in the month or quarter immediately following the period in which commissions are earned.  Some companies pay within a defined number of days of commissions being earned.  I recommend keeping to a regular schedule tied to normal payroll periods.

Recovery of Payments – Sometimes customers will rescind a sale after commissions are paid.  Or by mistake you may overpay or make incorrect payments.  For these situations, you need to include a clause that allows your company to recover overpayments.  This term may also be used to define recovery of draws or payments resulting from misrepresentation by the sales rep.

Disputes – Disputes can arise from disagreements on the amount of commissions, when commissions are earned, shared commissions or territories.  Who’s the final arbiter?  I recommend naming your vice president of sales or president of the company or business unit to make the final call.

Shared Commission Credit – As with disputes, the vice president of sales should decide when commissions should be shared among contributing sales representatives.  These situations arise when a sale is spread across multiple territories or when more than one sales rep makes key contributions to closing the sale.

Windfall Business – On occasion, business comes in without any work or contribution by the assigned sales representative, based solely on the company’s reputation.  In the case of true “windfall business”, your company should reserve the right to pay all, partial or no commission.

Misrepresentations – Your company should reserve the right to deny commissions on any business that results from misrepresentation on the part of the sales representative or the customer.

Acceptance of Transactions – Your company should also reserve the right to accept or reject any transaction brought to it by the sales representative.  You decide what is acceptable business, not the sales representative.

Partial Year Participants – Over the course of a year, you will hire new sales reps, fire reps, have reps resign or retire, and reassign sales reps to new territories or new responsibilities.  Your plan should address how commissions are handled in these situations.  Try using these terms:

  • New sales reps will be paid commissions on business they close and for which they made a direct contribution.
  • Sales reps assigned to new territory will be paid full commission on business they closed in their old territory.   Full commissions will be paid on business they initiate and close in their new territory.  Split commission or partial commission (according to value of their contribution) will be paid on all other business in old and new territories.
  • Sales reps assigned to new responsibilities (non territory sales) will be paid full commission on business they closed in their old territory.   Split commission or partial commission (according to value of their contribution) will be paid on all other business in the old territory.
  • Sales reps who retire will be paid full commission on business they closed in their old territory.   Split commission or partial commission (according to value of their contribution) will be paid on all other business in the old territory.
  • Sales reps who resign or are fired forfeit unpaid commissions and commission credits upon leaving employment of the company.  (Be sure to review this clause with your company’s employment attorney to ensure that it conforms to applicable laws.)

Changing of Plan – To allow your company to adjust to changing market conditions, include a clause that allows you to change or amend the sales compensation plan at any time.

Interpretation of Plan – Situations will arise that do not fit neatly into the sales compensation plan as it was envisioned or written.  Include a clause that defines who will interpret the plan in these situations.  I recommend assigning interpretation of the plan to the vice president of sales.

These terms and conditions should cover most situations.  However, you may want to include additional terms that your company needs to address its specific needs and control its business. You need to present a balanced and reasonably fair document to your sales team.  If the sales plan has too many administrative terms and heavily favors the company, it may kill sales rep motivation.  However, a sales plan with too few terms may leave the company exposed to reps who take advantage of every loophole and opportunity.

For more information, contact Wallace Management Group at (203) 834-0143 or email David Wallace.

© 2009, David P. Wallace

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  1. Your advice please. Can management change the rules and qualification of your sales rep. compensation plan after 9 months of the fiscal year is completed? I’m in Illinois and would like to know if there would be a government agency that I could go to and that governes this area?

  2. Whether or not you can change your compensation plan during the year depends on how you set it up. If you included a statement in your terms and conditions that allows management to make changes, then you should have no problem. This type of statement should be included as a matter of course. Since the market will likely change over the course of a year, you need to be able to change with the market. If there is no statement to that effect, then it depends on whether your compensation plan is considered a contractual agreement between your company and your reps with a defined contract period. Finally, if your employees are “at will” employees, meaning the company or the rep can terminate employment at any time (at will) and for no reason, then you should have a stronger case to change the comp plan at any time. I recommend you have an employment attorney take a look at your situation and provide specific advice.

    The state agency that would typically govern this area would be the Department of Labor. Just keep in mind, however, that the DOL is more likely to express an opinion that favors the individual employee rather than the company.

  3. I do not maintain examples of compensation plans online as that is proprietary to my business. If you would like to discuss an engagement, please feel free to give me a call.

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