Tip: How to Structure Commission Agreements

Post to Twitter

All Businesses Need to State What Date Sales Commissions Are Earned, and What Date Are They Payable

Your Sales Commission Agreement probably provides that a commission is due upon finalization of the sale.  But exactly when is the sale finalized?  This question can be answered without a business dispute if a Sales Representative Agreement is carefully drafted and tailored to the needs and realities of  business.  There needs to be clarification on the date of when a Sales Commission is “earned”—i.e., when it vests—and the date on when it is payable.

In many situations, a commissioned salesperson will submit to the company the signed purchase order or other such document evidencing that a sale has been made, and the company will accept the sale. Usually, payment terms allow the buyer at least 30 days to pay, sometimes longer. In some cases, a seller won’t ship the goods until payment is made in full. Also, in some cases, a buyer might be late with payment. So, there is an interim period between which the signed purchase order is submitted, and the buyer actually pays. Let’s call this the “Interim Period”.

Now, in many cases, the salesman or sales group responsible for this sale will terminate their relationship with the company during the Interim Period. Further, let’s also say that perhaps the buyer has had financial difficulties, and the delivery of the goods has been delayed. And, during the interim period, perhaps the company retains another salesman to take over the territory of the departed salesman (or sales group), and the new salesman basically inherits the pending sale and has work to do to make sure payment is received and delivery is made.

If payment is made during the Interim Period, and delivery is made, is the departed salesman / sales group entitled to the commission, even though the departed salesman wasn’t at the company during the Interim Period?T

There are a few ways to deal with this, practically speaking. Some readers will say, split the commission between the departed salesman who originally procured the Purchase Order, and the new salesman, who has to take some time to handle the delivery and generally deal with the buyer. Practically speaking, both salesmen have provided services to procure the sale and get paid and ship the goods, so both should be compensated on a practical basis.

Therefore, even though the original sales representative agreement doesn’t spell out what should happen in this situation, there is some logic to just letting the parties sort it out.

However, the departed salesman doesn’t have much leverage in this situation. After all, the company has the proceeds of sale, the new salesman is eager to be compensated, and the former salesman can threaten to sue, but realistically, it isn’t clear what their damages are going to be as a percentage of the sale proceeds.

Which is why I encourage sales representatives to include language in their sales representative contracts describing at what point a sale is deemed made and commissions earned. If it spells out that commission is earned upon a sale being deemed made, and the sale is defined as being made upon submission of a signed purchase order accepted by the company, then the commission amounts are “vested” in the sense that they have been earned, and are to be paid subject to the company getting paid. This is a far cry from arguing whether or not the commission is payable at all, or should be split. Rather, it is establishing that the commission is earned, and is payable as soon as the company receives payment from the buyer

No matter if you are a company paying salespeople on commission, or a commissioned salesperson, there are many intricacies involved in establishing payment of commissions; first, the date on which the purchase order is submitted and approved; second, the date on which the commission is deemed ‘earned’; and third, the date on which the commission shall be payable.

If you enjoyed this post, make sure you subscribe to my RSS feed!

Leave a Reply

Your email address will not be published.