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The recent hiatus within the Government and other economic pressures have meant rising inflation, and this will have an impact upon sales agents and their principals.
As inflation continues to rise and principals impose price increases on their products, the underperforming sales agent may go undetected. As a commercial agent’s commissions are usually based on the value of sales, an agent’s commission income may appear to be rising, whereas the reality may be that the number of sales may have flatlined or even dropped. This underperformance may go unnoticed for some time, but what happens when the principal realises that the agent is not performing satisfactorily and its underperformance is being masked by inflation?
Express sales targets
An agency contract may contain express sales targets. Some principals may review these targets regularly, but others may only be reviewed periodically. Some agency contracts will provide the principal with the ability to adjust sales targets in certain circumstances, one of which may be to reflect price rises of its products. Other agency contacts may provide the principal with little flexibility to adjust sales targets to allow for this type of scenario.
It is important that principals are aware of their contractual rights to adjust sales targets in different circumstances.
An agent may be hitting its sales targets and potentially being paid a bonus as a result, when the reality is that the agent’s performance may have significantly declined, and payment of a bonus may not be deserved. The principal will want to address this issue as quickly as possible.
Recording performance issues
If an agent is underperforming, the principal should address this as soon as possible. It is always advisable for principals to record in writing any performance issues and discussions/meetings with the agent, which will create a paper trail which will assist the principal if the performance issues are not resolved.
Flexibility to adjust contractual sales targets
The principal may want to adjust the sales targets to reflect the price increases of products, ensuring the agent’s performance is fairly rewarded. However, depending on the flexibility afforded within the contract to adjust sales targets, it may not be that simple. A principal must be careful not to seek to unilaterally impose new sales targets where it does not have the contractual right to do so, as that could amount to a serious breach of the agency contract, ultimately giving rise to the right of the agent to treat the contract as terminated and to claim a termination payment under Regulation 17. A principal should ensure it seeks advice so that it understands clearly to what extent it can adjust any existing contractual sales targets or impose new targets.
Impact of inflation on termination payments
The rise in prices of a principal’s products is likely to mean the agent is earning increased commissions as a result. Many principals may be wondering how this might affect the value of compensation and indemnity payments in the event of the agency being terminated.
If an agency is terminated and the agent is entitled to a termination payment under Regulation 17, the value of that payment is likely to be affected as a result of the rise in product prices. Whilst an agent’s commissions may have risen, and the performance of the agency may appear to have increased, that increase in performance may be illusionary. As discussed above, despite a rise in commissions, the performance of the agency may have declined.
Instead of typically looking to commission income when calculating compensation, it will be necessary to consider the number of sales. That will ensure the real performance of the agency is captured. A declining agency will, in the case of compensation, attract a lower multiple than a steady agency or one where performance is rising.
Similarly, in the case of an indemnity, any underperformance issues should be identified and reflected appropriately in the calculation of the indemnity payment under Regulation 17. At first blush, it may appear as though an agent has significantly increased the volume of business with certain customers due to price rises of products, when in fact, the number of sales may have flatlined or actually decreased. In those cases, such customers may be able to be excluded from the indemnity calculation. A failure to hit sales targets could also be used as an argument that the payment of the full amount of an indemnity is not “equitable having regard to all the circumstances” (which is one of the factors stipulated in Regulation 17).
Reviewing the performance of agents
In conclusion, principals are advised to take a close look at how their agents are performing, address and record any performance issues with the agent, and seek to adjust sales targets to allow for inflation and price rises where they have the contractual right to do so.