Three Frequently Missing Sales Compensation Clauses

This is the time of year for many to talk about sales compensation. However, most of the conversations span sales compensation plan design. This isn’t surprising – sales compensation plans motivate seller behaviors and reward performance that align with the overall strategy. While the plan designs are being finalized, sales compensation practitioners should also be taking a critical look at their current terms and conditions.

Previously, I have blogged on the Value of Well-Designed Sales Compensation Documents.  This blog focuses on three clauses – or sections – that are often missing.  They include:

• Dispute Resolution
• Exceptional Deals
• Ethical Behavior

These sections protect the organization and provide more transparency to the sales force.  Consider them as risk management for those unlikely events that may occur.  Here are more details on each section:

Dispute Resolution

This section tells sellers and managers how “disputes” or inquiries should be submitted and will be addressed.  Ultimately, you want to ensure that the company has a process that allows sellers to seek consideration and understand how disputes will be resolved.  Importantly, be clear on who has the right to decide or adjudicate these issues.  Resolving issues and making exceptions requires significant thought and consideration.

You don’t want to make an exception for one person that you wouldn’t for another.  Exceptions can create a precedent that limits your actions in the future.  Therefore, dispute resolution should be centralized to promote consistency.  Here is an example of what a dispute resolution policy can look like:

“All disputes or questions should be submitted to the sales compensation team, in writing.  If the company has made an error, it will promptly correct the issue and provide a true-up in the subsequent pay period.  For all other issues or exceptions, the Sales Incentive Council – comprised of the head of sales, head of finance and head of human resources – will review and decided on all matters.”

Exceptional Deals 

Exceptional deals are sales transactions that are particularly unusual. In some cases, they go by other names like “blue birds.” This policy provides significant protection to the organization but should not be used solely to limit commission payouts. This policy should only be triggered when necessary. Importantly, documenting this policy allows sellers to understand what an exceptional deal might look like and seek resolution before an exceptional deal closes. Here is an example of what an exceptional deals policy can look like:

“An ‘exceptional deal’ is described as any deal that is materially greater than the typical deal size/ range of the prior year or has been improperly forecasted or accounted for during the sales quota setting process. Criteria that may flag a deal as exceptional may include deals that are 50%+ of a sellers annual quota or deals that include 30%+ discount rate from suggested pricing. The company reserves the right to review all exceptional deals and alter the commission paid as a result of a closed-won exceptional deal. Sellers may contact the sales compensation team to discuss the compensation impacts of an exceptional deal before contract signing.”

Ethical Behavior

The ethical behavior clause may feel a little redundant as most organizations have a similar policy in their employee handbook.  The broader code of ethics likely suggests that unethical behavior can lead to employment actions up to and including termination.  This clause should complement the broader policy and highlight how sales compensation matters will be resolved.  This is the type of policy that will be rarely applied but it can strengthen the legal defensibility of clawing back commissions achieved through dubious conduct.  Here is an example of what an ethical behavior policy can look like:

“The seller agrees that he/ she will not engage in illegal conduct or gross misconduct which is materially and demonstrably harmful to the interests of the company.  Any such conduct, or willful attempt to commit an act of fraud or other similar act of criminal misconduct, significant dishonesty, including breaches of ethics or other immoral conduct which reflects adversely upon the reputation or interests of the company may result in disciplinary action, forfeiture of commissions and termination.”

Please note that all examples are abbreviated. Also, as a disclaimer, this blog may have touched on legal matters. I do not provide legal advice, and these suggestions should not be construed as a specific guide to action. I encourage you to consult with your legal counsel before applying the recommendations contained in this blog.