50+ Sample Commission Agreements

What is a Commission Agreement?

A commission agreement is a written contract between a business organization and an individual. The business possesses services or goods for sale, while the individual markets the services or goods on its behalf. The company promises to compensate the individual through a commission, which is a fee for every successful business transaction that increases company sales. There are two basic types of commission arrangements: sales and real estate commission agreements. A sales commission contract lays out the payment details a company has to pay to a salesperson, where a salesperson can be an employee or independent contractor. A real estate commission contract is an arrangement between a seller and an agent, where the seller agrees to give an agent a portion of the sales once a buyer purchases his property.

The Different Forms of Sales Commission

Every company needs to have a sales commission structure that increases its profitability. According to Forbes, in 2016, there were about 5.7 million sales representatives in the United States, which means that more and more people are seeing the benefit of getting into a career that focuses on sales. The following are different forms of sales commissions a company can take advantage of.

Straight Commission. In this type of plan, the sales representative collects his commission directly from the sales. This means that a salesperson can earn as much as he desires depending on the outcome of his efforts. Typically, the company offers a high commission rate because it is not under obligation to pay for a base wage. Therefore, the sales representative has full control of his/her income, and he can work flexibly or overtime if he wants to earn more. Mostly, straight commission representatives are independent contractors. For that reason, the company can save some money since it doesn’t have to pay for the contractor’s taxes and benefits.Base salary plus commission. This is one common type of commission arrangement that most companies use. A company may choose to pay on a monthly or hourly basis. This structure puts pressure both on the employer and the sales agent. The company is responsible for paying an agent a base salary and a commission for every sale. Most of the time, the commission a salesperson gets is more than his base salary. For that reason, sales representatives usually rely on their commissions more than their salaries to get enough income. The good thing about this structure is when the market slows down, an agent can still rely on his/her salary to get by.Revenue Commission. This model applies to both types of commission structures mentioned above, this is what sets a company’s commission rate. This is a popular model that field business organizations use because of the kind of products they sell. For example, if an agent sells a $2,000 worth of service, he will get a 10% commission. Several businesses choose this type of method because their goal is to increase market share and expand their market territory. Their initial focus is not on profit but greater business aims. Paying a sales representative based on this model is fair enough for both the company and the sales representative. Top performers earn more and idle agents earn less or even none.Gross margin commission. A model that is slightly different from the revenue model, a gross margin commission considers the cost of the product a sales agent sells. Instead of earning a portion of the sales revenue, the sales representative only gets a portion of the profit. For example, an agent sells an item for $2000 and its cost is $1200, the agent will only collect a percentage for the $800 profit. For that reason, a sales agent will choose to sell the product at a higher price to receive more incentive. Therefore, they can’t afford to offer discounts since it will affect their pays.Draw against commission. In this type of model, a salesperson is guaranteed a specific amount of payment monthly, regardless of his/her sales. If the commission is lesser than the draw money, the sales representative will still keep the commission and draw amount. Additionally, he will also receive the result of deducting the commission from the draw amount. For example, an agent is entitled to get a $3000 draw and earns $2000 as his commission, he gets to keep both incentives with an additional $1,000. Unfortunately, these draw payments must be repaid by the salesperson. The draw against commission models tend to be complex, and sales representatives will have a hard time predicting their income.Tiered Commission. To motivate salespeople, companies often use this model to reward sales performers. Every time a salesperson reaches a sales quota, his commission rate changes. For example, an agent may obtain a 3% commission on sales that range from $10,000 to $20,000. Once he passes over that mark, he can earn a 5% commission on sales that range from $20,000 to $25,000, and so on. The same applies to underperformers, who will receive less monetary compensation if they cannot reach their quota. For example, a sales agent who only achieved 80% of his quota will only receive a commission out of his 80% sales.Base rate alone. Only very few business organizations use this type of model. Instead of getting a commission for every sale, a salesperson receives payment at an hourly rate. It is similar to being employed. Companies who use this model, don’t offer incentives, therefore salespeople are often unmotivated to sell more. It doesn’t encourage, even sales performers, to do their best. Both top performers and underperformers receive the same compensation regardless of their efforts. Nevertheless, companies whose focus is on inbound sales choose to use this model because sales representatives spend more of their time supporting the company rather than selling.

commission-agreements

How to Construct a Sales Commission Agreement Sample

A sales commission agreement can be between a company and an employee, or it can be between a company and an independent contractor. The contract outlines the payment structure and the relationship between the two parties involved. The following are steps on how to construct a sample of a sales commission contract.

Step 1: Write a Statement of Authorization

An authorization statement permits the salesperson to sell the services or products of a company or employer. In this section of the contract, the employer specifies the limits of selling. A salesperson will only be permitted to sell within the bounds of the company’s territories. Moreover, the document should clearly state that a sales agent is prohibited from rebranding their products for selling.

Step 2: Include an Agreement Concerning Sales Documentation

The sales representative must agree to use documentation tools approved by the company to keep a record of his sales. This allows the company to estimate its return on investment and revenue, receive accurate sales reports, increase productivity, improve its campaigns, and more. Tools for documentation may include forms, software, CRM databases, etc.

Step 3: Protect Confidential Information

Insert a non-compete and non-disclosure clause to protect confidential information. A non-compete clause prohibits a sales representative from working or selling for a competitor for a specific period after completing a contract with his previous employer. A non disclosure agreement refrains an employee from sharing a company’s intellectual property, such as patents and trade secrets.

Step 4: Detail the Commission Structure

This is the heart of the agreement. In this section of the contract, both parties must clearly understand the structure of compensation. The agreement should address the questions: What are the terms for obtaining commission? When will the sales agent receive his commission? What are the consequences in case a buyer cancels a transaction, asks for a refund, or doesn’t pay?

 Step 5: Finalize the Agreement

In this last section of the agreement, a statement that makes both parties agree to the conditions of the agreement is written. By dating and signing the contract, the employer and sales representative become bound to the agreement. Also, don’t forget to add the governing law and arbitration clause to regulate the contract.

FAQs

What are the best sales jobs for beginners?

The following are sales jobs that will help you, as a beginner, to begin your sales career. (1) Purely commission-based job positions. This will help you strengthen your passion for selling since you have no base salary to rely on. (2) Inside sales. This can be a good training ground for you. It involves dialing more than a hundred people a day just to sell a service or product. (3) Insurance sales. This allows you to develop your skills in prospecting clients, presenting policies, and closing a deal.

What are the six high-paying sales jobs in the U.S.?

According to CNBC, there are six high-paying sales jobs in the United States: (1) a sales engineer with a salary ranging from $68,000 to $185,000, (2) a software sales agent with a salary ranging from $50,000 to $141,000, (3) a realtor with a salary ranging from $27,000 to $111,000, (4) a pharmaceutical sales representative with a salary ranging from $52,000 to $84,000, (5) a medical device sales agent with a salary ranging from $38,000 to $87,000, and (6) a recruiter with a salary ranging from $37,000 to $77,000.

What are the advantages of commission-based compensation?

There are two main advantages of a commission type of pay. First, it motivates your employees to work competitively, and second, it helps a company manage its payroll expenses effectively. Note that professionals who are highly talented in marketing and sales get more from their commission than basic salaries.

What are some tips to improve commission sales?

If you are a person with a passion for entrepreneurship, then a career in commission sales may be for you. Here are some tips to help you improve your sales: (1) Search for a potential product to market. (2) Clearly define and know your prospects or target market. (3) Learn to manage your time and money.

Are commissions taxable?

Yes, commissions are taxable. Commissions are normally a part of an employee’s regular pay, therefore, they are taxable. Note that state and federal taxes along with FICA taxes are withheld from commission payments. On the other hand, for independent contractors, commissions are directly given to them. Since the individual is not under employment, income tax and FICA taxes are not withheld in this matter.

A commission agreement protects the rights of a salesperson to receive a commission, and at the same time, it protects the trade secrets of a company. If you are not yet confident enough to construct a commission agreement, you can download one of our printable contracts above. If you decide to create one, you can ask help from a lawyer to ensure that the document is enforceable.