Skip to content
Clausery

What is a sales commission agreement?

Published · Business deals, money and releases

A sales commission agreement sets out how variable pay is earned. It is the document that answers the questions people argue about at the end of a quarter: which deals count, when the commission is paid, and what happens if the customer cancels.

What it should cover

  1. The plan and the period. Which role, which products and which financial year or quarter the plan applies to.
  2. The commission base. Revenue, gross margin, cash collected or a quota. Say whether tax, refunds, discounts and shipping are included.
  3. Rates and tiers. A flat percentage, a tiered table, or a quota-attainment accelerator. Show a worked example so the maths is unambiguous.
  4. When commission is earned. On signature, on invoice, on payment or on delivery. This is the clause that causes most disputes.
  5. When it is paid. The payroll date after the period closes, and whether payment depends on the customer paying.
  6. Cancellations and clawbacks. If a customer cancels, defaults or receives a refund, is commission reversed? From which payment, and how long after?
  7. Draws and advances. A recoverable draw is a loan against future commission; a non-recoverable draw is a minimum. Say which one applies.
  8. Changes and termination. How the plan can be changed, what happens to commission in progress when employment ends, and whether the agreement survives.

A worked example

QuarterClosed revenueRateCommission
Q1$80,0005%$4,000
Q2$120,0007% above $100,000$5,000 + $1,400 = $6,400
Q3$60,0005%$3,000

The example should state whether the tier applies to all revenue once the threshold is crossed or only to the amount above it. Write the rule, not just the numbers.

Commission and the contract of employment

Commission is usually part of pay, not a gift. In many countries it must be included in holiday pay, notice pay and final pay calculations, and a change to the plan can be a contractual change that needs agreement. Treat the agreement as part of the employment contract, not a side note. For independent sales agents, say clearly that the relationship is one of contractor and client, and check whether local law gives the agent protection or a right to compensation on termination.

Mistakes to avoid

  • Changing the plan mid-quarter without agreement. It destroys trust and may be a breach of contract.
  • Hiding the definition of a qualified deal. If a deal only counts when it meets criteria, publish the criteria.
  • An unfunded accelerator. A rate that makes the plan unprofitable is worse than no plan.
  • No record of calculations. Keep the statement for each period showing deals, base, rate and adjustments.

Put it in writing

The free sales commission agreement template covers the plan period, rates, payment timing, clawbacks and termination. Use the sales commission calculator to check a tiered plan before you offer it, and the freelance contract guide if the salesperson is an independent contractor rather than an employee.

General information, not legal advice. Commission, holiday pay and termination rules differ by country and state.

Questions

Is a sales commission agreement legally binding?

It is usually binding as part of the employment or contractor relationship, provided the terms are clear and lawful. A plan that can be changed at will may still be enforceable, but changing it without agreement can breach the wider contract.

When should commission be paid?

The agreement should say: on signature, invoice, payment or delivery, and on which payroll date. Many businesses pay after the customer pays, which reduces clawbacks but delays the salesperson's pay.

What happens to commission when an employee leaves?

It depends on the agreement and local law. Some plans pay commission on deals closed before the last day; others require the employee to be employed on the payment date. The termination clause should say which.

More on business deals, money and releases

Browse all guides by topic