Every salesperson or business likes a commission. It is the reward for all the hard work put into selling the products or services of an individual or corporate entity.
But sales commissions need to be agreed upon by the principal and the agent before the agent can even commence with selling the commodities on offer. This is where a commission agreement templatecan prove to be very useful.
This template provides documented proof of the principal and agent relationship. It also provides a legally binding contract that specifies the agreed sales commissions that the principal will pay the agent upon the last meeting of certain specified sales targets.
This guide will get to know more about a commission agreement, including why it is important and the best practices involved. We also urge you to download our free commission agreement templateif you want to pay your in-house sales agent's commissions or you want to outsource the selling of your commodities to third-party agents.
What is a commission agreement?
A commission agreement is a variable form of remuneration that a principal pays to an agent to achieve certain predetermined sales performance objectives.
The principal, in this case, can be an individual or a corporate body, while the agent can also be a person or business entity.
The remuneration paid to the sales agent is known as a commission fee. And this commission fee is often a percentage of the sales revenue that the agent can generate for the principal party.
A typical example is a principal agreeing to pay a sales agent a 10% commission fee for every USD$10,000 sales they make. This means that the sales agent will earn a commission fee of USD$1,000 for every USD$10,000 sales revenue generated.
A commission agreement can be found in virtually every field of endeavor. However, such agreements are more common in the financial services, consumer goods, mortgage brokerage, and real estate fields.
Whenever a commission agreement contract is drawn up, it legally binds the principal and agent to specific terms and conditions. A commission agreement template is a formal document that captures the T&Cs for commission fee payments by the principal to the sales agent.
Why is a commission agreement important?
A commission agreement is important to any business for the following reasons:
- Improved Loyalty: One way to ensure the loyalty of your sales team is to give them rewarding incentives by way of a lucrative commission agreement.
- Improved Sales Performance: When sales agents know that their income is tied to their performance, there is a greater incentive to perform to the best of their abilities.
- Improving individual Sales Agents: A commission agreement can turn average sales agents into top performers. It can also make top performers even better, as they are highly motivated to sell and make money for themselves.
- Reduce Staff Turnover: Commission agreements can also help reduce the number of workers handing in resignation letters because they have gotten better-paying jobs. Therefore, a commission agreement reduces staff turnover, as your workers will be committed to making money for themselves and your business.
- Avoid Head Hunting: Businesses are constantly looking for top-performing sales agents. You can secure the salesperson's services over a long period with attractive commission agreements.
Best practices for commission agreements
Commission agreement contracts can vary from one business to another. However, the best practices for commission agreements remain the same. Here are a few worth noting:
- Draw up individualistic contracts: You need to meet with your sales agents on a one-on-one basis. Each agent has their own individual goals, and you need to identify what these goals are and see how you can merge their personal goals with your business targets.
The commission agreement for one sales agent may differ from another. For example, high-performing agents may earn better commission fees than average sales agents. It is also good to build a personal relationship with each agent when drawing up a commission agreement template.
- Transparency is what matters most: When drafting a commission agreement, you need to be as transparent as possible with your sales agents.
It is important to let each agent feel like a part of the business and not just a worker. This way, they will take the survival and growth of the business seriously. They will invest their time, effort, and even personal funds to ensure that the business thrives.
- Be concise with the structure of your commission agreement: Make sure there are no ambiguities to your commission agreement structure. It is important to make the structure very clear for all concerned. The way you share your revenue is entirely up to you, but you should make sure the commission fee you intend to reward sales agents for their performance is well spelled out in the contract.
Q1: What exactly is a commission letter?
A1: A commission letter is a formal document drawn up by a principal and handed over to a sales agent. This letter states the terms and conditions for employment and the commission structure and fee.
Q2: Is a commission agreement legally binding?
A2: Yes. A commission agreement is a legally binding contract between the principal and sales agent. A sales agent can seek legal recourse if a principal fails to meet their end of the agreement.
Q3: Can a commission agreement be terminated?
A3: Yes. A commission agreement can be terminated if either the principal or agent breaches the contract terms. The contract can also be terminated upon submitting a written notice of termination by either party, provided this notice is done within the notice period agreed upon.
Q4: Is your commission agreement template editable?
A4: Yes. Our commission agreement template is available as an editable MS Word document to enable you to adjust the content to suit your purpose. However, we advise that you consult your lawyer to ensure that all provisions included in the revised template are in-tune with local labor laws.