Employee bonus schemes and sales commission agreements

Key terms in the bonus scheme should be properly defined

The Bonus Scheme/Sales Commission Agreement should also properly define its key terms. This includes key concepts such as commission, currency, product, market, new business/follow-on business, timing of payment, overachievement, whether it is contingent on performance of other company divisions, cancellation of orders etc.

In addition, the Bonus Scheme needs to make clear whether payments made under the scheme are discretionary or nondiscretionary.

If you are seeking a Bonus Scheme that will ultimately create enforceable legal rights that would enable you to sue for the recovery of unpaid commission, it must be a nondiscretionary scheme. Ultimately, a discretionary Bonus or Commission Scheme does not create contractual rights that would enable you to sue for recovery in the event of non-payment.

Discretionary bonuses need to paid on a frequent basis

If the company is only prepared to offer a discretionary Bonus or Commission Scheme, you should pay careful attention to the timing of the payment, so that you receive commission payments on a frequent basis. This would prevent the build-up of unpaid commission which you would stand to lose in the event that your employment were terminated.

Be mindful of commercial risks the company may be asking you to assume –will you actually ever receive the bonus?

A company that is seeking to structure your remuneration package on the basis of a Bonus Scheme/Commission Agreement is asking you to assume a commercial risk of non-payment in the event that you do not qualify under the scheme.

In our experience, the schemes that have caused most problems for our clients have been those:

• where there is a lack of transparency in the way the scheme is meant to operate; and
• which contain provisions under which the company reserves to itself the right to revoke the commission rules.

If a Bonus Scheme that is being offered to you has either or both of the above characteristics, you can draw your own conclusions about how serious the company is about ensuring that you will be paid your bonus/commission.

In this event, you would probably be better off renegotiating your remuneration package so that a smaller proportion of your income is commission/bonus-related. This may not always be possible, but it is certainly the most obvious way of reducing your exposure to non-payment.

How the employment agreement defines “non-performance” is critical

Problems relating to unpaid commission/bonuses frequently occur when the executive’s employment has been terminated for alleged non-performance etc. How the employment agreement defines “non-performance” is therefore critical.

Take legal advice

You should take legal advice before signing any employment agreement which involves acceptance of a separate Bonus Scheme/Sales Commission Agreement.

Executive Rights Employment Lawyers have had extensive experience in this area. If you are seeking advice on a Bonus Scheme or Sales Commission Agreement, please don’t hesitate to contact us.