What to Know about Renegotiating Sales Commission Agreements
July 27, 2022
If you utilize outside sales representatives to sell your products, you may have a hard time making deals economically feasible in the midst of an economic downturn. When the future is uncertain, you may be wondering how to accommodate your customers, handle supply chain issues, and still comply with your existing commission agreements. Here are tips on how to renegotiate commission agreements, and what to include to protect your company.
1. Know your existing agreements.
If the goal is to lower a rep’s commission rate, the first step is to review your existing agreement. You may have only a handshake oral 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 was negotiated by attorneys. Surprisingly, no matter what form your agreement takes, the analysis is the same. That said, you should get your agreements in writing.
2. Is your rep entitled to a fixed commission percentage?
It is not unusual for a sales rep to cut a company a deal on his or her commission in order to make a deal economically feasible. When companies make these changes, they often don’t document it properly (if your existing agreement was based on a handshake or a series of emails, I’m talking to you). That means you aren’t aware of the risks of violating the laws on paying sales representatives and you are opening yourself up to future lawsuits 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 attorneys’ fees. For example, the Illinois Sales Representative Act entitles a sales rep to three times the amount of underpaid commissions plus their attorneys’ fees to sue you. So, the risks of getting this wrong are severe.
3. Consider your options for adjustments to sales rep commissions.
If reps are unwilling to reduce their commission in an acknowledgement of the financial difficulties your company is facing (be it supply chain issues, inflation, or economic downturn), you have a few options. You can consider setting future revenue targets at which the commission would increase to more “typical” levels. You can design a flexible commission structure that varies based on order size/duration that allows you to change each deal so you don’t have to go through this process again. Or, there’s the nuclear option: you may need to terminate the sales representative.
Most companies don’t understand when they can terminate a sales representative agreement. If your commission agreement does not have an express duration or a specific event that terminates it, it is probably terminable at will. That means that, although your sales representatives are entitled to commissions on sales that they procured pre-termination, most commission agreements can be terminated by the company. In Illinois, an agreement that says it entitles the sales rep to commissions “so long as” they sell products to a certain customer is not sufficiently definite and can be terminated any time. Chances are, unless you negotiated commissions to last for a specific number of years, your agreement is terminable.
4. Consider what you can provide the sales rep in exchange for the adjusted commission rate.
Given that superior bargaining position, and as long as it’s clear that you are trying to make the deals feasible under the circumstances rather than simply take advantage of your reps, you are in a strong position to renegotiate. The only thing worse for the rep than a lower commission is no commission, so review your contract carefully (preferably with a lawyer familiar with terminating commission agreements) to know your options.
If you are successful, know that you can’t get something for nothing. Lowering commission rates is no different, so make it clear in the new agreement what consideration you are giving the sales rep in exchange for a lower commission rate to make it enforceable. It could be a lump sum of money up front (even if small) in exchange for a lower rate, faster payment terms, or some other incentive in exchange for reducing their rate. There are less obvious, lawyerly ways to make these agreements enforceable, too. But you must give the rep something of value or you risk running afoul of the laws protecting sales representatives.
Once you have an agreement on the adjusted sales commissions, be sure to read get the agreement in writing. You can read more about what to include in a commission agreement here.
LP has significant experience advising clients in connection with relationships with outside sales representatives. If you have any questions, please don’t hesitate to reach out.