Commission policies and plan agreements work together to keep your sales team both motivated and properly rewarded for their hard work. Although the two terms are often used interchangeably, there are some subtle differences you should know.

To summarize:

• A sales commission policy is a document that outlines the rules and guidelines for how commissions are determined and paid to the sales team (e.g., when commissions are earned, how they are calculated, and any other conditions or restrictions that apply).
• A sales commission agreement is a legal contract between the company and an individual team member that outlines their specific commission plan (e.g., terms of payment, commission rates, quotas, etc.) — it’s proof that both parties have agreed to the terms of incentive compensation.

So, while a sales commission policy sets out general guidelines for how your organization determines and pays commissions, a sales commission agreement is a contract between your organization and an employee that outlines their individual commission plan.

What do these typically look like in the sales commission plan? Let’s dig into more details.

What is a Sales Commission Policy?

A sales commission policy outlines how sales reps earn and receive commissions, ensuring consistency and transparency. It should define specific rules and guidelines, such as eligibility criteria, payout terms, and payment timelines. Establishing a sales commission policy informs your team of your expectations and what they can expect in return. Without a standardized and clear policy, you open the door to inconsistencies and possible disputes. 

A well-documented sales commission policy is often contained within your sales commission plan, which broadly outlines the overall commission structure. The policy provides transparency throughout your sales team and makes it easier to apply your commission plan consistently. Here are a few best practices when creating your sales commission policy.

Sales Commission Policy Best Practices

We now know what a sales commission policy is, but what are the guiding principles when creating one?

Keep it Clear and Transparent

To motivate salespeople to do their jobs effectively, make the commission policy specific, clear, and transparent. You want it to be easily understandable and leave no room for interpretation. Clear, specific, and comprehensive verbiage in sales commission policies helps align a company and its salespeople on commission terms, reducing the likelihood of disputes over commission payout amounts. For example, define terms like “closed deal” or “qualified lead.” Supplement written explanations with tables, charts, or even screenshots and links to your incentive compensation management software to help sellers visualize their potential earnings under different performance scenarios.

If a commission-related dispute does arise, having a written sales commission policy that addresses the underlying issue can help save a company time and headaches. 

Align Compensation With Business Goals

Good sellers will hit the ground running — make sure they are running toward the correct finish line. Before finalizing your commission policy, work with leadership to verify the business’s strategic priorities. For example, growth-phase organizations may value new customers and market expansion, so they might provide more commission for new logos over renewals. 

Once you are clear on the business goals, establish metrics that align with them. Be sure to regularly review these goals as your organizational priorities change and update your commission policy accordingly. The most effective commission policies don't just compensate for sales activity — they strategically direct it toward outcomes that matter most to your organization's success while creating clear earning opportunities for your sales professionals.

Set Achievable, Motivating Quotas

Achievable yet challenging sales quotas are strong motivators for a quality sales team. Highlight how your quotas are data-driven based on historical trends like growing demand and business strategies like new markets. Use real-world and concrete examples in your sales commission policy so your sellers can see that their quotas are realistic, even if a bit of a stretch. For example, showcase how three deals at a specific size and two renewals each month can get a rep to their quarterly quota.

Clear examples help reps understand the commission rates and calculations. When reps can see themselves in a scenario, they will be more motivated to reach their quotas. Plus, examples make your policy easier to read — many reps aren’t going to read a 10-page commission policy document in its entirety.

Regularly Review and Update the Policy

Your sales commission policy should not be a static document. Your market evolves, and your business goals and commission policy should as well. Schedule quarterly reviews with sales leadership to address any clarity issues, such as common misunderstandings, or fine-tune based on product updates. Set up annual reviews with organizational leadership, including sales, finance, marketing, and legal counsel, to make sure the policy reflects market and business expectations. For example, your organization might be launching in Europe, so your sellers may be further incentivized to prospect in that market.

What is a Sales Commission Agreement?

A sales commission agreement is a contract between an employee and employer detailing the commission structure and plan for that individual. The legally binding agreement should specify how an employee’s commissions will be calculated and paid based on their performance and any other associated conditions. This commission agreement is signed by both parties and often includes clauses for dispute resolution should any issues arise under the agreement.

To be considered a legally enforceable contract, a sales commission agreement will typically need to include these five key contract elements:

1. Offer & acceptance: The document details the terms of the agreement being extended to the employee. Think of the offer as an expression of willingness by the party making the offer to enter into a contract, where the offer can be accepted or rejected by the other party. For the contract to be accepted, the other party must agree to all terms of the offer. One way to indicate acceptance is through signing a contract.
2. Mutual assent: A “meeting of the minds” must occur between the parties regarding the agreement, meaning that the parties understand and agree to the terms and basic substance of the contract.
3. Consideration: Something of value must be mutually exchanged between the parties involved, so each party must give something of value and receive something of value. In the case of a sales commission agreement, the employee brings in qualified leads or closes deals and the company pays a commission.
4. Capacity & competency: The parties involved must be of sound mind and have the legal capacity to enter into a contract.
5. Legality: The contract must be formed for a legal purpose and must not violate any applicable laws or regulations.

Like a sales commission policy, a sales commission agreement is a crucial document in a well-functioning sales organization because it sets clear expectations with your individual sales reps.

Why is a Sales Commission Agreement Important?

A sales commission agreement with your reps not only provides clarity for all parties but can also protect your organization from liability.

It Protects Both Employers and Sales Reps 

The sales commission agreement sets the legal boundaries and expectations for your organization and your sales team. It defines the scope of compensation and performance expectations and, when done correctly, establishes the condition for commission eligibility and provides a framework for measuring and evaluating effective sales activities. Once signed, everyone is clear on when a seller earns a commission, when they don’t, how much they are paid, and under what circumstances a contract may be terminated. Your sellers are protected because the agreement outlines the specific terms for how and when they are paid, and your organization is protected because the seller acknowledges they understand the expectations.

It Ensures Clear Payment Terms 

A well-crafted agreement leaves no question on the terms of the commission payment. It includes the commission formula, which differs based on the type of sale. It spells out exactly when a commission is earned, such as when a new agreement is signed versus when the first invoice is paid, as well as what happens if the deal falls through or the client cancels. Similarly, the agreement includes the payment schedule for those commissions — for example, on the 15th of every month — accounting for the previous month’s sales, so the seller knows when to expect their commission.

It Encourages Sales Performance 

The clarity in a sales commission agreement provides predictable rewards based on the individual contributions of a seller. Because the rep can see how the commission is structured for them specifically, they can pursue more aggressive sales targets based on what will help them earn more. For example, if the seller knows they will reach their quota faster by selling a particular product or jump to a higher commission tier by inking one more deal that month, they will be more motivated to do the work. It gives each seller a sense of control over their compensation.

Customer communications platform Intercom saw this first-hand. When they provided transparency into their commission structure to their sales team, the organization immediately felt the impact of the improved communication around commissions. One member of the Intercom sales team said, “As an SDR, transparency and trust in my commission payouts is of the utmost importance. Not only in planning my personal finances but considering the longevity of the company I work for.”

It Prevents Legal Disputes

With clear, unambiguous terminology and comprehensive performance and termination provisions, your sales commission agreement can resolve legal disputes before they become costly challenges. The agreement provides the documentation trail required to earn a commission. Both the employee and the organization can refer to the agreement should there be confusion about whether a commission is paid. 

Your agreement should also outline the dispute process. That process should include an internal review, timeline, and any mediation or arbitration protocols in the event there is a dispute, such as about a clawback or missed payment.

Sample Sales Commission Plan Terms

Here is a sample of terms to consider including in a simple sales commission agreement. There may be others specific to your industry or goals. When you are ready to draft your sales commission agreement — or employer-employee sales commission agreement, as it’s sometimes called — consult legal counsel to ensure you cover all your bases.

When it comes to sales commission plans, the devil is in the details. This is especially true for account executive roles, which are high-stakes and highly rewarding positions. 

The terms and conditions in an AE’s commission plan will usually be more substantial than others because of the material risk associated with the position and complicated compensation structures. An AE’s performance is typically measured through the revenue or sales volume of deals closed. The higher the deal amount, the higher the stakes. The sales commission agreement protects the organization from inflated or unearned income and protects the seller’s earned income.

A more detailed sales commission plan might include the following policies/terms.

Key Summary

The key summary is typically the first section of the commission plan. It helps the employee understand the basics of the plan and may include information such as:

• Company name
• Employee name
• Job title
• Plan start date
• Target annual variable
• Annual quota
• Base salary
• Accelerated rate

​​Key Definitions

Defined terms are important in legal documents — they ensure all parties have a clear understanding of each term. Therefore, commission plans typically include a set of definitions that are relevant to the organization. Some of these terms might be industry-specific — for example, OTE and sales quota — while others might be company-specific definitions, such as qualifying deal.

Commission Plan Overview

The commission plan overview typically outlines the general commission structure and helps ensure that all parties understand what they are entitled to. It provides reps with a summary of the main plan components and potential risks associated with commission payments so that they can plan their time more effectively.

Quotas (or Targets) & Quota Schedule

Quotas, or targets, outline the minimum sales goals a seller must meet to receive a commission. A seller can receive a commission (or reward) if they achieve their quota within a given period, which is determined by a quota schedule. This section should spell out how quotas work and their structure, how managers measure quota attainment, and the timeframe for achieving these goals. A quota schedule should typically include metrics such as quota type (monthly, quarterly, or annual), target quota amount, and other relevant figures. 

Here’s an example of what a quota schedule might look like for a quarterly quota:

• Jan-Mar: $50,000
• Apr-Jun: $50,000
• Jul-Sep: $50,000
• Oct-Dec: $50,000

Deal Eligibility

Deal eligibility details the criteria or conditions that must be met for a sale to be considered a deal that earns a commission for a rep. This section usually covers what revenue amount commissions will be calculated on.

Ramp Period

The ramp period is a designated amount of time, usually at the start of a sales rep’s employment, during which the rep typically has quotas that are less than their full quota. The quota increases over the course of the ramp period until the sales rep is at their full quota. 

For example, a company with a monthly quota and a three-month ramp period might set a new sales rep’s quota at ⅓ of the full monthly quota for their first month, ⅔ of the full monthly quota for their second month, and the full monthly quota for their third month. This section of the sales commission agreement typically specifies the duration of the ramp period and any special conditions that apply during this period. 

Draws

A draw usually refers to a fixed commission advance that allows reps to receive part of their expected commission upfront. A draw is typically advanced against future unearned commissions. Draws are often used to help reps receive income more evenly and can sometimes assist reps in bridging cash flow gaps between sales cycles. 

A draw may be recoverable or non-recoverable. If a company provides a recoverable draw to a rep for a given sales cycle, and the rep’s commission earnings for the sales cycle end up being less than the draw amount, the company can typically recoup the difference — often from the rep’s future commissions. On the other hand, if a company provides a non-recoverable draw to a rep for a given sales cycle, the company typically cannot recover any portion of it, even if the rep’s commission earnings for the sales cycle end up being less than the draw amount. The rep simply keeps the entire draw payment.

Commission Rates & Calculations

The commission rates and calculations section outlines how the commission amount is calculated. In this section, you might find examples illustrating how different commission rates apply.

Commissions Payment Schedules 

​​This section describes the timing for when commissions are earned and paid, which may vary by deal type.

Additional Commission Terms

Some agreements include additional commission terms to allow for further customization to meet each company’s needs and unique circumstances. 

This section might include provisions such as:

• Time not worked/Leaves of absence 
• Termination of employment
• Non-compete
• Non-disclosure
• Taxes and withholdings
• Business ethics
• Anti-corruption
• Dispute resolution 
• Employment at will

Common Mistakes to Avoid

Sales commission agreements are important documents for your sales team — they should be clear, complete, and current. Here are a few common mistakes to avoid when creating your sales commission agreement.

Using Vague or Ambiguous Language 

Without clear language and concrete examples, your sellers may not prioritize the activities with the most benefit. Vague or jargon-filled language can also invite legal disputes over what constitutes a commission-earning event.

For example, rather than stating, "Compensation shall be remitted to the party of the second part upon verification of revenue realization," the agreement could simply say, "The company will pay commissions within 30 days after the customer pays their invoice." 

Failing to Specify Payment Schedules

According to the 2024 State of Incentive Compensation Report, 85% of respondents said representatives “who have visibility into their compensation performance are more motivated.” When reps know when they will get paid and how much, they are likely to drive more impact. Not including payment schedules and clear calculations can create confusion and lower motivation.

Ignoring Legal Compliance 

Good sales commission agreements provide clarity and transparency to help you avoid legal disputes. Ignoring legal compliance with your agreement can trigger costly wage claims, particularly around commission payment timing and proper calculation methods. Non-compliant agreements may violate labor laws in different jurisdictions, creating expensive legal headaches that distract from core business operations and erode trust. Always get legal advice when creating and updating your sales commission agreement. 

Overcomplicating the Commission Structure 

The goal of a sales commission agreement is to make sure everyone understands the expectations of the sales role. By turning your commission structure into a complicated flow chart, you run the risk of demotivating your sellers or confusing them so they focus on the wrong priorities. Commission tiers and multipliers make sense for many companies. But five tiers with variable multipliers based on contract length and modifiers based on new logos versus new products create unnecessary complexity and confusion.  

Neglecting to Update Agreements 

The sales team of a seed-stage startup will look different from that of an established company. The sales commission agreement should look different, too. Update your agreement to match the needs of your business so your sellers are focused on the types of deals that move your organization forward. A young company gaining market share may want to incentivize new logos, no matter the size, whereas you might focus on deals that are $5,000 or higher once you’ve become established in a market. You may miss out on talent by having an outdated agreement that doesn’t match industry standard rates or role-specific expectations, such as multi-year commission opportunities for enterprise AEs.

How to Create a Strong Sales Commission Agreement

When drafting your sales commission agreement, keep these best practices in mind.

Use a Clear, Easy-to-Understand Format 

In addition to accessible language, use a standardized template that is easy to read and understand. Incorporate section headings for commission rates, ramp periods, and deal eligibility for easy skimming, and use a digital platform or PDF so reps can easily search for topics they are most interested in. An easy-to-follow format improves transparency and removes confusion.

Customize the Agreement for Your Industry 

Your sales commission agreement should reflect your business goals, which may vary by industry. For example, a SaaS company may want tiers based on the initial contract value and incentives for renewals. A pharmaceutical company may require sellers to abide by certain regulatory requirements or their deal becomes ineligible for a commission.

Include Legal and Tax Considerations 

Work with your legal counsel and tax advisor to verify that your sales commission agreement complies with local, state, and federal laws. Also, help your reps understand the tax implications of the different types of income and how they will affect their take-home pay. Provide training on how base pay will be taxed at a different rate than commissions and bonuses and offer access to a tax advisor for more detailed questions.

Outline Dispute Resolution Processes

A clear and structured dispute resolution process enables you to resolve any disagreements before they become costly legal issues. This clarity gives sales representatives confidence that their concerns will receive fair consideration while allowing your company to address issues systematically rather than reactively. Mirror your resolution process from your sales commission policy, including an internal review, timeline, and any mediation or arbitration protocols, but make sure to reflect any role-specific adjustments. Sales managers may require a multi-level internal review, while SDRs might have a more simplified dispute process.

Include Duration and Termination Conditions

Be sure to include the effective date for the agreement, the end dates, and under what circumstances it can be renewed or terminated. Some organizations have their reps sign a new agreement every year so it can be updated to reflect new changes, but some organizations might keep their agreements in place for multiple years if there are no major changes. Provide terms for extended medical or family leave, including duration that matches your organization’s leave policy and details about account coverage and expectations. Include information on what happens if a seller is promoted or leaves the company while the agreement is active and what to expect with earned but unpaid commission.

Build High-ROI Sales Commission Plans

Your sales team will only be as good as the sales commission plan you create.

If you take anything away from this article, it should be to build commission plans and policies that are clear, specific, and transparent. The key to succeeding in creating a sales-focused culture is alignment.

CaptivateIQ allows you to design any commission plan without being limited by pre-set templates, save time in payout processing, and motivate sales reps through real-time visibility. Learn how JMAC Lending manages compensation in CaptivateIQ to avoid “changing [its] plans simply to conform to the system.” Read the case study!

Note: This content is for informational purposes only and should not be construed as financial, accounting, tax, legal, or compliance advice or guidance. Please consult a professional adviser for guidance on your specific situation.‍