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The Wells Fargo scandal1 sparked a broader public argument on the efficacy of sales commissions as a corporate governance tool. The incident occurred in 2016, prompting Wells Fargo to revise its sales commission agreement frameworks. The bank also changed its culture and clawback policies to rebuild trust and address the issues that led to the scandal.  

This incident opened an opportunity for companies across various industries worldwide to revise their sales agreement and clawback policies2. 5,300 Wells Fargo employees opened 2 million unauthorized accounts, leading the bank to claw back $180 million in executive compensation.  

Such action showcases the need to reinstate clawback3 in the sales commission agreement and focuses on creating a structure with distinct targets, triggers, and penalties. Therefore, this blog will share an outline of the sales commission agreement so that you stay prepared for what needs to be added. 

What is a sales commission agreement? 

Sales commissions refer to payments provided to sales agents as compensation for completing specific sales or achieving predetermined sales targets. Typically, these commissions are calculated as a percentage of the total sale value. For instance, a car salesperson might earn 20% of the vehicle's final price. While some sales agents rely solely on commissions for income, others receive a combination of commissions and hourly wages.  

A sales commission agreement, however, is a formal document essential for employees working as sales agents or representatives. It outlines the terms and conditions relating to the commission-based compensation earned by the sales representatives. Such agreements are typically incorporated into the overall employment contract and may cover: 

  • Both involved parties in the contract. Their contact information and other identification. 
  • The amount of percentage they will receive after closing each sale. 
  • Monthly or weekly quotas that a sales representative needs to meet in terms of sales volume. 
  • The hourly wages that the salesperson might get paid. 

The amount for sales commission structure is typically determined through negotiation before a sales position is filled. These terms are then formalized within a sales commission agreement. The specified commission amount and the agreement itself can generally be adjusted as the employee gains more experience in the sales role. Therefore, the following aspects may impact the terms that could go into the agreement: 

  • Industry standards. 
  • The sales representative's sales records. 
  • The sales volume of the representative throughout their employment. 
  • Geographic-dependent factors, such as the cost of living for a particular state or city. 

Now that we've discussed what affects your sales commission, let's review the basic details of the agreement. 

The basics of a sales commission agreement: 

The basics of the sales and commission agreement that one must know to understand their agreement include: 

  • Commission structure: This defines the calculation method for determining the commission amount, such as a fixed percentage, tiered rates, or bonus structure. 
  • Sales quotas: These are specific sales targets that must be met to earn a commission. 
  • Payment terms: This specifies when and how the commission will be paid, such as monthly, quarterly, or upon receipt of payment from the customer. 
  • Expenses: The agreement may outline which expenses are reimbursable to the salesperson. 
  • Termination clause: This addresses the conditions under which the agreement can be terminated by either party. 
  • Dispute resolution: The agreement may include provisions for resolving disagreements related to commission calculations or other terms. 

One must know these aspects of the agreement to smartly resolve any dispute. Take Wells Fargo for example. 

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Wells Fargo has a policy in their sales and commission agreement that allows the company to reclaim compensation from sales representatives who cause harm to the bank's reputation.

Since 2002, the bank's leadership has been aware of fraudulent account openings to meet sales targets. Despite repeated occurrences, the relevant regulatory body failed to publicly address or take action against Wells Fargo until 2017.

Despite employees creating over two million fraudulent accounts, Wells Fargo did not initially impose clawbacks as outlined in its sales commission agreement. Instead, the company terminated 5,300 employees and paid substantial government fines. 

However, in September 2016 when Wells Fargo's CEO, John Stumpf, faced intense scrutiny during a Senate Banking Committee hearing. Shortly thereafter, the company enacted its contractual clawback provision, citing reputational damage.

As a result, Stumpf and Carrie Tolstedt, head of the Community Bank division, forfeited significant bonuses and equity awards. Wells Fargo ultimately reclaimed over $180 million from executives as their sales commission agreement stipulated that the company could recover compensation if certain conditions were met, such as fraudulent activities, misconduct, or material misrepresentations. 

Wells Fargo used the sales and commission agreements as a basis to initiate clawback. They argued that the fraudulent activities of employees violated the terms of their employment and compromised the integrity of the sales process. 

This underscores the importance of creating a thorough sales commission agreement.  

Sales commission agreement best practices: 

The case study of Wells Fargo's sales commission agreement and the subsequent fallout offers several best practices for designing and managing sales compensation plans.  

  1. Maintain transparency: Clearly outline the commission rate, calculation methodology, and payment schedule. Indicate the sales targets, quotas, and performance criteria determining commission eligibility. Also, include provisions for product returns, discounts, chargebacks, and other relevant factors that may impact commissions. 
  2. Propose a balanced compensation structure: Sales compensation plans should strike a balance between base pay and variable pay. Wells Fargo's aggressive pay mix, which favored variable compensation, contributed to a high-pressure environment that incentivized unethical behavior. A reasonable balance can help maintain motivation without fostering desperation among employees, which can lead to misconduct. 
  3. Maintain fairness and motivation: Ensure the commission plan incentivizes behaviors that contribute to overall company objectives. Establish sales targets that motivate salespeople without being unrealistic or discouraging. Provide compensation packages that attract and retain top sales talent. 
  4. Strong governance and oversight: Effective governance structures are essential to monitor compliance with ethical standards. Wells Fargo's failure to address the fraudulent activities of employees over many years highlights the need for robust oversight mechanisms. Organizations should implement regular audits and have clear accountability for sales practices to mitigate risks associated with unethical behavior. 
  5. Consider a commission plan audit: Conduct regular reviews to identify potential discrepancies or areas for improvement. Also, utilize commission software. You can employ specialized tools to streamline calculations, track performance, and enhance efficiency. 
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Take Compass for example. Compass automates the calculations involved in incentive compensation. It can handle over 10 billion real-time calculations to ensure 100% payout accuracy and reduce payout escalations by 67%. The platform also supports analytics and reporting tools along with integration with various data sources for seamless data management without the need for rigid data formats. You can centralize the sales data, leading to a reported 56% increase in quota attainment and a 49% rise in sales revenue. 

The Wells Fargo case serves as a cautionary tale about the potential pitfalls of poorly designed sales and commission agreements. So, referring to a best-laid sales commission agreement template is your best option. 

Sales commission agreement template 

The agreement would start with outlining the details about both parties. It would include the info about the parties, date, the details about the companies in the following way. All the sales commission agreements have the following elements: 

1. Purpose: The purpose of this Agreement is to establish the terms and conditions under which the Salesperson will earn commissions from sales of the Company's products and services. 

2. Employment status: The Salesperson is an independent contractor and not an employee of the Company. This Agreement does not create an employer-employee relationship. 

3. Commission structure 

  • Commission rate: The Salesperson will receive a commission of percentage of the gross revenue from sales generated by the Salesperson. 
  • Eligible sales: Only sales that are fully paid and non-refundable will be eligible for commission. 
  • Payment schedule: Commissions will be paid on the [day] of each month for sales completed in the previous month.

4. Calculation of commissions: Commissions will be calculated based on the gross revenue from eligible sales, excluding any discounts, returns, and allowances.

5. Payment of commissions

  • Timing: Commissions will be paid within [number] days after the end of each month. 
  • Method: Payments will be made by [payment method, e.g., direct deposit, check].

6. Term and termination

  • Term: This Agreement will commence on the effective date and continue until terminated by either party. 
  • Termination: Either party may terminate this Agreement at any time, with or without cause, by providing [number] days' written notice to the other party. 

7. Confidentiality: The Salesperson agrees to keep confidential any proprietary information or trade secrets obtained during the term of this Agreement and not to disclose such information to any third party. 

8. Governing law: This Agreement will be governed by and construed by the laws of the State of [State]. 

9. Entire agreement: This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements or understandings, whether written or oral. 

10. Amendments: This Agreement may be amended only by a written document signed by both parties. 

Conclusion

Sales commission agreements are essential for defining the terms of compensation between a business and its sales representatives. These agreements outline the commission structure, payment terms, and the nature of the employment relationship, thus protecting both parties from misunderstandings and potential legal issues.  

Moreover, clearly defined commission structures can motivate sales representatives to achieve their targets, as they understand how their efforts translate into earnings. To streamline the commission process, rely upon Compass. It is a platform designed to streamline the management of sales commission agreements and related processes. Compass can: 

  • Automate commission calculation based on predefined criteria; 
  • Track performance and commissions in real-time to foster transparency in the compensation process; 
  • Be integrated with existing CRM systems.

Make it easier to manage sales data and commission calculations in one place with Compass. Schedule a demo call with our experts to learn how Compass can be the solution to your disoriented commission calculation, and management in the agreement.

Citations

1. Waters, C. (2022, October 19). Here’s what the Wells Fargo cross-selling scandal means for the bank’s growth. CNBC. https://www.cnbc.com/2022/10/19/heres-what-the-wells-fargo-cross-selling-scandal-means-for-the-bank.html 

2. SEC adopts final rule on “Clawback” policies (November 14, 2022). (n.d.). https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2022/sec-rule-clawback 

3. Nasim, N. (2024, April 25). Clawback: Definition, types, benchmarks, best practices. Blog | Compass. https://blog.getcompass.ai/clawback/

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