By Neil Ende, Managing Partner at Technology Law Group
This is Part II of this article. Please check out Part I, by clicking here.
We’ve heard all the arguments and justifications that are presented for sales quotas: that they are necessary to ensure that the agent continues to work or that the relationship makes economic sense. In our opinion, these arguments are largely unfounded and, in any event, the penalties are generally so punitive that the claimed rationale does not justify the existence of the quota.
If there’s no way around agreeing to one, here are some critical points to consider when negotiating the contract.
First of all, a quota obligation does not need to continue for the entire term of the agreement. In many cases, a quota can apply until the agent meets some reasonable revenue level, at which point the quota no longer applies even if the revenue falls below that level. These terms can be crafted to meet the providers desire to ensure that the agent is committed while limiting the scope and duration of the quota in a manner that is fair to the agent.
Moreover, if your agreement has a quota obligation, extreme care is required with respect to the penalty for non-performance. In many cases, the penalty for non-performance—regardless of how minimal—is the compete loss of commissions. This means that if you have a $10,000 commitment, if you only sell $9,900, you lose the entire commission. In our opinion, this penalty is much too extreme and, in fact, creates an incentive for providers to impose conditions that make it impossible for agents to meet their quotas.
At a minimum, there needs be some proportionality between the underperformance and the loss of commission revenues; i.e., the loss of commissions should be proportional to the underperformance. Further, in addition to the bilateral obligations discussed above, the agreement should measure performance over at least a series of months and provide a period of cure to avoid the imposition of any penalty where the underperformance is associated with one or a small number of billing periods.
Extreme care is also required to ensure that a quota obligation does not negate the evergreen terms of your agreement. A properly drafted evergreen term must contain specific language guaranteeing the payment of commissions on all revenues generated from customers brought by the agent, including on all revenues following the termination of the agreement for cause. Termination allows the provider to refuse to take new business; it should never allow the provider to stop paying commissions on revenues generated from customers brought by the agent. In this context, to avoid negating a properly drawn evergreen term, any penalty for a failure to meet a quota cannot be the basis for a refusal to pay commissions on evergreen revenues.
The simple truth is that, as benign as they may seem, quotas are fraught with risk. By agreeing to a unilateral quota, you are placing your livelihood in the hands of a provider who may, at best, be unwilling or unable to run his/her business in a manner consistent with your best interest and, at worst, may utilize the quota arrangement as the means to retain your commissions. Protect yourself by avoiding quotas in their entirety where possible or, where you must agree to a quota, by insisting that the quota be subject to bilateral obligations that minimize your risk to uncontrollable factors and that maximize your opportunity to meet your commitments.
Don’t miss Part I, on the reasons to be wary of a quota obligation, and how to analyze them within a contract.
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