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Sales Commission Agreements & Target Letters: What You Need to Know

Sales Commission Agreements & Target Letters: What You Need to Know

Targets and objectives are a foundational element of any successful sales team. It’s safe to say that if you’re in sales, you’re going to have targets that you need to achieve. These objectives are set by a combination of the leadership team and the team tasked with managing sales compensation. They’re then built into the various plans and used to calculate each sales team member’s variable compensation.

Most importantly, these targets and the sales compensation plans that they influence need to be communicated with the sales team themselves.

That’s where sales commission agreements and target letters come into the picture. 

They provide sales teams with clear expectations about their performance and transparency around how their variable compensation will be calculated. It’s a simple win-win action that’s critical to establishing clear expectations between the sales team and the company.

So, what exactly are commission agreements and target letters and how do you use them properly? Let’s dive in.

What’s a Sales Commission Agreement?

Sales commission agreements outline the targets that need to be achieved, the details and attributes of the compensation plan, and how the different compensation components will affect payouts. 

Let’s start with targets. This agreement outlines the specific targets and goals to be attained by a salesperson within a designated period. Depending on the company culture, targets can be set unilaterally by the leadership team or mutually agreed upon by both sales and leadership. 

These objectives may be quantitative, such as sales figures or quotas (in which case, they can be termed “quota objectives''), or qualitative, like completing certain projects. Nevertheless, the majority of sales targets are quantifiable. These targets can be set at various intervals, such as annually, semi-annually, quarterly, monthly, and more.

Commission agreements also outline the details and components of the compensation plan and how they can affect commission calculations. For example, many compensation plans incorporate minimum thresholds that need to be met to earn increasing commission rates (decelerators). On the flip side, additional commission increases are often offered to salespeople who surpass their targets (known as accelerators).

Sales commission agreements inform the sales team of alterations to their targets, commission components, and plan structure. By signing the commission agreement, the salesperson agrees to the plan’s terms. If the company wants to move forward, it’s often a mandatory step (though this depends on the region). This is just one of the major reasons why the targets found in the plan need to be challenging but attainable. 

What are Target Letters?

Target letters set specific targets and objectives that need to be completed by a salesperson in a specified period. 

If you feel like you’re having a case of déjà vu, you’re not wrong. Sales commission agreements also set targets in the same way as target letters. Targets can be set by management or collaboratively, objectives can be qualitative or quantitative, and the periods can range from weekly to yearly.

What’s The Difference?

There is a key difference between the two.

Sales commission agreements are sent when there have been changes made to the compensation plan or when a new salesperson is onboarding (and is seeing the plan in detail for the first time) and include targets.

Target letters, on the other hand, are sent when the existing compensation plan stays the same but changes have been made to the salesperson’s targets. 

Benefits of Commission Agreements and Target Letters

Why should you be using commission agreements and target letters? Well, in many countries, it’s a legal requirement as a starter.

Regardless of whether it's a requirement or not, it’s still worthwhile. Outside solidifying sales team objectives, sales commission agreements and target letters provide companies with many benefits, including:

  • Aligns Expectations: Clearly defines the company’s expectations of a salesperson.
  • Motivates Sales Teams: Provides the sales team with precise objectives and rewards that increase commitment and motivation.
  • Provides Performance Evaluation Criteria: Offers objective metrics to be used during sales team performance reviews.
  • Creates a Culture of Transparency and Fairness: With objective performance criteria agreed upon by all parties, assessments can be done more fairly and rewards can be distributed more impartially. 
  • Sets Priorities: These documents help sales teams understand the organisational focus and prioritise the right tasks to get the best results.

The Legal Side: What You Need to Know

In many locations, commission plan agreements and target letters are a legal obligation. While the precise requirements can vary by location, there are common aspects that are important to know.

Objectives are Communicated to the Salespeople 

Step one is making sure that your sales team is fully aware of their objectives from the very beginning of the period (though it’s easier said than done). The communication around the commission plan or target letters must be written in the native language of the salesperson.

Salespeople Need to Approve It

Once communicated, the salespeople need to approve the commission agreement or target letter. The action that constitutes a salesperson’s “agreement” with the document is highly dependent on the country. In many locations, a signature (whether physical or digital) is required. However, in others like France, by just reading a commission agreement or target letter, a salesperson can be considered to have agreed to it. 

Targets are Realistic and Achievable 

For variable commissions to be fair, the targets they are tied to must be realistic and achievable. Practically speaking, that means objectives must be fair and reasonable for both parties, aligning with your company’s current position and the market environment. To understand if your targets are realistic, reflect on the current market situation and whether the objectives give your salespeople room to operate within it. If it’s not the case, your targets can be deemed unrealistic, potentially voiding the commission agreement.  

Furthermore, objectives are considered achievable only if the salespeople are provided with the necessary resources to meet them and the company doesn’t hamper their efforts. This means that companies need to specify the resources provided to their salespeople to help them reach their objectives as this establishes that the company has not influenced nor is liable for any failure by its salespeople to meet their targets.

Last but not least, if you want to make changes to your commission agreement or targets, you can’t do it unilaterally. For any modifications to goals or objectives to be considered legal after the initial agreement, the salesperson must formally agree to the changes.

Complies with the Minimum Legal Salary Requirements 

Your commission agreement also needs to stay in compliance with legal requirements, particularly around salary. That means you need to pay at least minimum wage or, if the sales team is covered by a collective bargaining agreement, the minimum salary outlined in said agreement. You can’t set targets for commissions that are lower than that.

Assessment Criteria are Objective

Assessing whether a salesperson has met their targets must be done using neutral, objective criteria. These criteria need to be clearly defined and quantifiably measurable to allow for fair assessment metrics. Subjective objectives based on a manager’s or leadership’s feelings about the performance of a particular salesperson aren’t going to cut it.

The objectives you set must be realistic and achievable (but, to keep motivation high, you should still make them challenging). They need to be communicated to your salespeople alongside the frameworks that will be used to calculate their variable compensation.

When objectives meet these criteria, they provide you and the company with a strong and transparent tool to assess performance. Failing to meet well-defined objectives provides companies with grounds for dismissal (though you must ensure that it’s due to the salesperson rather than the market environment or internal limitations). 

Avoid Surprises

When dismissal disputes arise, judges generally review the sales commission agreement, accounting for the practicality of the objectives, the level of fault by the salesperson, the resources provided by the company, and the market environment. Ensuring your sales commission agreements and target letters combine the above aspects is critical to avoiding any unwelcome legal surprises in the future.

How Helps You Go Further

Sales commission agreements and target letters are powerful tools for aligning expectations, motivating employees, evaluating performance, ensuring transparency, and building trust. Creating impactful agreements and letters requires clear communication, realistic targets, objective evaluation criteria, and legal compliance. 

Nevertheless, managing sales commission agreements and target letters each year can feel overwhelming, especially if done manually. Lucky for you, can help with that.

Our sales commission agreement and target letters feature has been invaluable for our customers over the past few years, facilitating transparent communication and delivering an exceptional experience to their sales teams. Making changes to sales commission agreements and target letters is simple. Distribution is even easier, agreements and letters are automatically sent to your sales team once they’re ready and you get full visibility on when they’re read and confirmed by each salesperson. Commission Agreement and Target Letter Tracking

Well-defined objectives and effective communication create a win-win situation for companies and sales teams alike while tools like make the process simple, fast, and efficient.