What do we do when a sales person leaves the company before the last payment is made for a contract closed by the sales person? Do we still pay after termination?
There are three reasons most often cited for paying over several years on a multi-year deal:
- The value of the deal is not really clear at contract signing. This would be the case if the contract were really for a rate vs. for a guaranteed total price paid at pre-specified dates. For example, one client in the business of delivering online testing contracts for a rate per test, but the total test volume can be very hard to predict. In such cases, even if the sales person is really mostly responsible for closing the deal, and someone else picks up the delivery/client management, the payment needs to be made after revenue is recognized.
- The sales person needs to stay involved to keep the customer happy and make sure the contract “goes.” This is the case in a combination sales/client management role where the deal could end up not being as-signed if delivery is not managed carefully, and the organization wants the sales person involved in ensuring things go as planned (or another way of saying this that things go as that sales person promised they would).
- The company believes the promise of future payments is a good tool for retaining top sales talent. (You’ll find that we question this assumption, but that’s the topic of a another post.)
In case of #1 above, you might consider continuing payment as the rationale for not paying up-front is that you don’t know how much to pay. However in cases #2 and #3, you probably would prefer to avoid paying the terminated employee. Depending on the nature of your sale and your compensation plan, and local (state) laws, you may have no choice but to pay the terminated employee. However, for many sales roles a helpful approach is to include language in your sales compensation plan document (you do have one, and it’s signed by your sales people and their managers, and a record of this is kept by the company, right?)… anyway, include language in that plan document that says something like:
The commission is earned when the final payment on the contract is made, and all commission payments in advance of final payment from the customer are advances against future earnings. The sales person must be employed at the time the commission is earned to be eligible for payment.
So, for example, if your sales person sells a 3 year deal with annual payments, and if your compensation plan pays annually when payments are received from the customer, and if the sales person leaves the company after receiving the 2nd of those three expected payments, then technically you would be owed the first two payments. However, you should probably make it standard practice to “forgive” that “debt.” But it would be quite clear that you do not owe the third payment.
We are not attorneys and cannot give legal advice, but have recommended this approach to many of our clients, and their attorneys have felt it was a good idea and legally defensible.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.