(This post is a slightly edited version of my answer to the above Quora question.)
Legalese is the least of your problems when it comes to sales incentive policy. The crux of the issue is to crack the incentive structure.
From personal experience, that’s a non trivial problem.
Sales incentive policies always begin with good intentions. The goal is to incent sales reps to sell more. Accordingly, the incentive structure starts out with the simple formula that sales incentive will be a certain percentage of orders booked (typically 0.5 to 2.5%, depending on the ticket size in the industry and company).
Then it meets the first objection, which can be expressed in the following manner: “Sales reps are paid salaries to sell, why should we pay them incentives on top of that?”
The sales manager overcomes it by explaining that sales incentive is meant to motivate the rep to overshoot their quota and will be payable only if the rep crosses a certain threshold of his or her target (typically 70-90%).
Then the policy is socialized with Marketing, HR, Finance, and C-Suite. Each org will add some more objectives to the policy and tack on more conditions.
Marketing will want to ensure that sales promotes new products over legacy ones. Accordingly, it will insert a clause around product mix in the sales incentive policy. For example, SAP is making a major push to upgrade all customers on its previous ECC version to the latest S/3HANA ERP, accordingly sales reps don’t get any incentives for selling more ECC licenses (In fact, SAP’s website has stopped mentioning ECC on its navigation bar.)
HR will want to ensure that there isn’t too much disparity in compensation between employees in the same level of the org chart (even if their performance is disparate), so it will insert a clause to cap the incentive. In one company I worked, sales incentive was capped at 60% of salary.
Finance will be mindful of outstandings, so it will stipulate that incentive will be payable only after all payments are received from the customer i.e. after the order is booked, delivered, billed and collected.
Top management will want to ensure that the EPS numbers it has committed to Wall Street / Dalal Street are met, so it will insert a clause related to margin.
Then there are companies that use incentive not only to reward sales reps that get it but also to motivate others who don’t. Accordingly, instead of paying out sales incentives in cash to their bank accounts, they gift items of conspicuous consumption (e.g. car) so that everybody knows what the winner got.
I can go on and on but I’m sure you get my drift that the incentive structure that comes back to sales after going around various departments will bear little resemblance to the one that was initiated by sales.
Inevitably, sales will reject the first version of the policy.
Then leaders from all orgs get into a huddle, negotiatons happen, there’s give-and-take, and eventually a policy that’s agreeable to all parties is finalized. To give an example of compromise, another company I worked in paid out 50% of sales incentive upon order booking and the balance 50% upon receipt of all payments from the customer.
If it sounds a bit complicated, that’s because it is – at least in many midsize or large companies. For example, in the aforementioned company, payments were collected by a central bill collection department that was part of corporate finance org, so sales had no control over the second 50% of its incentive.
Not sure what your role in the incentive policy formulation is but if it’s to simply draft a clause in the appointment letter and be done with it, your best bet would be to go with a line like
Sales Incentive Clause
You will be eligible for incentives, the details of which will be communicated to you upon completion of your probation period and are confirmed in the services of the company.
I know this clause doesn’t say much but it’s the best you can do if you’re not involved in the formulation and approval of the sales incentive policy.
Before concluding, let me share an interesting anecdote around sales incentive: My second ex-employer mentioned above was based out of Oman. Eight months after I quit this company and returned to India, out of the blue, I received a demand draft in Rial Omani (RO) by courier. Thanks to the attached covering letter, I learned that the DD was for the balance 50% incentive payable consequent to the collection of all outstandings on my sales by the bill collection department. It was a well-known fact in many companies that sales guys could kiss their incentive goodbye after they quit the company, so, TBH, I never expected this component of my incentives. It spoke volumes about the company’s integrity that it paid out without any follow up from my side.
On a side note, this incident gave me my first experience of depositing a non-INR cheque into my INR bank account in India. It took weeks for the RO cheque to go all the way to Muscat and come back to India for clearing but I did eventually sight good funds in my account after 25-30 days.
Fifteeen years later, as I highlighted in Why B2B Suppliers Should Accept Credit Cards, it took the same time for a USD cheque to clear. While I wrote this post on the challenges in USA-India B2B crossborder payments back in 2011, the pain areas described therein are still present even today, at least with SME customers in USA that have bank accounts in credit unions and community banks rather than regional or megabanks.
Over the years, many startups have reached out to me with potential solutions to this problem but none of them have worked out: Some of them could handle B2C crossborder payments but didn’t work for my B2B context. Others proposed crypto / blockchain solutions, only to chicken out when they found out that it’s quite difficult for them to open bank accounts in India to provide fiat off-ramp.
A couple of weeks ago, the founder of another startup connected with me on Twitter to introduce his product for USA-India B2B crossborer payments. It’s a novel solution based on fiat currency but my CA firm has highlighted operational, credit and regulatory risks with its operating model, so I’m doing more due diligence before deciding the way forward.
