How to Write a Sales Commission Agreement

When a salesperson finalises a significant deal for their company, it’s essential to have a well-defined commission structure in place to prevent any misunderstandings about their compensation. Without clear terms, disputes may arise, leading to frustration and decreased motivation among sales staff. A sales commission agreement serves as a vital tool for businesses to establish transparency and fairness. In this guide, we’ll discuss how to create an effective sales commission agreement, outlining key components and the advantages of having one.

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.

This agreement plays a crucial role in ensuring that the business and its sales team agree on expectations, targets, and rewards. By providing clarity and transparency, it helps build trust, reduce disputes, and hold both parties accountable for their responsibilities.

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?

A properly structured sales commission agreement should include essential elements to guarantee transparency, fairness, and legal security:

1. Identifying the parties – Clearly state the names and addresses of both the company and the sales representative, defining their roles and obligations.
2. Effective date – Mention the specific date when the agreement officially comes into effect.
3. Agreement duration – Define the time frame of the agreement, including its start and end dates. To establish the period during which the commission terms are applicable.
4. Commission framework – Clearly outline how commissions are determined. Whether through percentage-based rates, fixed payouts, or tiered structures tied to sales performance.
5. Sales authorisation – Ensure the sales representative has official approval to market and sell the company’s products, services, or assets.
6. Post-termination commission policy – Specify how commissions will be handled after contract termination, including any final payout terms and conditions.
7. Commission payment terms – Define the frequency and method of commission payments (e.g., monthly, or quarterly). Along with any applicable deductions or adjustments.
8. Qualification criteria for commissions – Set clear guidelines on what constitutes an eligible sale, including any restrictions or conditions that could prevent a deal from earning a commission.
9. Sales goals and performance benchmarks – Outline the expected sales targets, minimum quotas, and any potential consequences for failing to meet performance standards.
10. Non-disclosure and Non-compete provisions – Specify limitations on disclosing sensitive company information and include a non-compete clause that restricts representatives from joining or partnering with competitors for a defined time frame.
11. Conditions for termination – Clarify the conditions under which either party may end the agreement, along with any necessary notice periods.
12. Conflict resolution process – Outline the steps for resolving disputes, including options like mediation, arbitration, or legal proceedings. To ensure an equitable solution for all parties involved.

What are the benefits of a sales commission agreement?

A sales commission agreement offers numerous benefits for both businesses and their sales teams, fostering a strong, collaborative working relationship.

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.

Best practices when using sales commission agreements

Define commission structures clearly

It’s essential to outline the commission structure with precision, ensuring that sales representatives understand exactly how their compensation will be calculated. Specify whether commissions will be based on a percentage of sales, a flat fee per deal, or a tiered system that increases as sales targets are surpassed. Additionally, clarify when and how commissions will be paid—whether it’s on a monthly, quarterly, or per-sale basis. This level of detail not only removes ambiguity but also helps sales reps plan their finances more effectively and understand the financial rewards tied to their performance.

Set realistic and attainable targets

Establish sales targets that challenge your team without setting them up for failure. Setting achievable goals not only boosts motivation but also encourages long-term commitment. Targets can be adjusted based on individual performance and shifts in the market, allowing for flexibility.

Provide detailed job descriptions

Clearly outline the roles and responsibilities of sales reps to ensure accountability and focus. Define how success will be measured, as this will help guide individual efforts and personal growth. Having clear expectations encourages greater productivity and alignment with company goals.

Regular communication and feedback

Encourage an open dialogue with the sales team, providing constructive feedback that helps with their growth and performance. Regular updates and communication will keep everyone aligned and motivated.

Utilise technology for tracking and management

Implement CRM software to effectively track sales activities and manage commission calculations. Using digital tools like E-Sign can streamline processes, reduce errors, and improve overall efficiency.

Ensure up-to-date documentation

Make sure that all terms and conditions are consistently updated and well-documented. Keeping accurate and current records helps ensure transparency, minimises the risk of misunderstandings and strengthens accountability.

Invest in ongoing training and development

Offer thorough training to your sales team on products, sales techniques, and the commission structure. Continuous education and development ensure your team remains well-equipped to succeed and close high-value deals.

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.