What to know about renegotiating sales commission agreements | Levenfeld Pearlstein, LLC
If you use outside sales representatives to sell your products, you may find it difficult to make economically feasible deals in the midst of an economic downturn. When the future is uncertain, you may be wondering how to meet your customers’ needs, manage supply chain issues, and still meet your existing commission agreements. Here are tips on how to renegotiate commission agreements and what to include to protect your business.
1. Know your existing agreements.
If the goal is to reduce a representative’s commission rate, the first step is to review your existing agreement. You may only have a verbal handshake agreement with a custom and practice of paying a certain amount over many years. You may have a series of emails that make up your commission agreement. Or, you may have a more formal contract that has been negotiated by lawyers. Surprisingly, whatever form your agreement takes, the analysis is the same. That said, you should get your agreements in writing.
2. Is your representative entitled to a fixed commission percentage?
It is not uncommon for a sales representative to make a deal with a company on their commission in order to make a deal economically feasible. When companies make these changes, they often don’t document them properly (if your existing agreement was based on a handshake or a series of emails, I’m talking to you). This means you’re unaware of the risks of breaking sales rep compensation laws and exposing yourself to future legal action at a time when you can least afford it.
Specifically, many states have laws that allow sales representatives to collect more than the amount of their underpaid commissions, plus attorney’s fees. For example, the Illinois Sales Representatives Act permits a sales representative to thrice the amount of underpaid commissions more their attorney fees to sue you. Thus, the risks of being wrong are serious.
3. Consider your sales rep commission adjustment options.
If representatives are unwilling to reduce their commission due to the financial challenges your business is facing (whether it’s supply chain issues, inflation, or an economic downturn), you have several options. You might consider setting future revenue goals at which the commission would increase to more “typical” levels. You can design a flexible commission structure that varies based on order size/duration, allowing you to modify each trade so you don’t have to repeat this process. Or, there’s the nuclear option: you may have to fire the sales rep.
Most companies don’t understand when they can terminate a sales rep contract. If your commission contract does not have an express duration or a specific event that terminates it, it is probably terminable at will. This means that while your sales reps are entitled to commissions on sales they earned prior to termination, most commission agreements can be terminated by the business. In Illinois, an agreement stipulating that it entitles the sales representative to commissions “as long as he sells products to a certain customer” is not specific enough and can be terminated at any time. Chances are, unless you’ve negotiated commissions for a number of years, your agreement is terminable.
4. Consider what you can offer the sales rep in exchange for the adjusted commission rate.
Given this superior negotiating position, and as long as it’s clear that you’re trying to make deals workable under the circumstances rather than just taking advantage of your reps, you’re in a strong position to renegotiate. The only thing worse for the representative than a lower commission is no commission, so review your contract carefully (preferably with an attorney familiar with terminating commission agreements) to learn your options.
If you succeed, know that you can’t get something for nothing. Reducing commission rates is no different, so make it clear in the new agreement what consideration you give the sales rep in return for a lower commission rate to make it enforceable. It can be a lump sum of money (however small) in exchange for a lower rate, faster payment terms, or some other incentive in exchange for a reduction in their rate. There are also less obvious legal ways to make these agreements enforceable. But you must give the representative something of value or you risk breaking laws protecting sales representatives.
Once you have reached an agreement on adjusted sales commissions, be sure to read the agreement in writing. You can learn more about what to include in a commission agreement here.