Paid by Net Sales, Net Profits, Net Revenues? – Always Ask, “Net of WHAT?”

Paid by Net Sales, Net Profits, Net Revenues? – Always Ask, “Net of WHAT?”

“The louder he talked of his honor, the faster we counted our spoons.”

– Ralph Waldo Emerson

ACTUAL CASE HISTORY: After seeking a job in the growing 3-D Printer industry for several months, Corey gladly signed an Offer Letter for a job on a Sales Team for a high-end 3-D Printer manufacturer. These machines create an object using a process in which material is joined or solidified under computer control to create the three-dimensional object. Some of them cost up to $100,000 each.

The job was exactly the kind Corey was seeking. It offered a decent salary, and also an Incentive Commission Program that compensated members of Corey’s Sales Team 1% of “Net Sales” on a semi-annual basis. Corey was confident in his sales abilities, and so was especially happy to secure a position with “performance-based cash compensation.” ***

During Corey’s first six months, he was attributed $4 million in sales, and thus had earned a commission of some $40,000. Two weeks after the six months, Corey received his commission check, which was only for $16,000. Thinking this must be a mistake, he inquired with the company bookkeeper.

To his surprise, Corey was told that his $4 million of sales was reduced to a “net” sales amount of just $1.6 million, due to reduction for a rather large number of “netted out” costs, including among others, (a) advertising costs, (b) salespersons’ salaries, (c) something called “anticipated warranty expenses,” (d) travel and entertainment reimbursements, (d) support staff salaries, (e) delivery costs, (f) percent of non-paid invoices, and even (e) something called “share of general overhead.”

Yes, all of these and more were “netted out” when calculating Corey’s “net sales” of equipment. A careful review of the company’s Sales Commission Plan unfortunately revealed that the calculation of “net sales” is not capable of review or appeal, but rather “in the company’s sole, absolute and unreviewable discretion.”

***Note: In this newsletter, I use the term “performance-based cash compensation” to refer to employment in which some or all of the compensation will be earned and calculated based on your level of “successful performance.”

LESSONS TO LEARN: The Lesson to Learn here is incredibly simple, and critical: if you work in sales, business development, marketing, sales generation, or brokerage fees of any kind, that is, in which you are to be compensated in whole or in part based on how much you sell, produce, or collect, be very careful whenever you see the word “net.” Whenever you do, it is very important that you ask your employer (or would-be employer) “Net of WHAT?”

And, so, before you accept a job, it pays to take a few minutes to ask if there are any “rules” for determining (a) first, what “net” means in your circumstances, (b) if you will be provided with the “net” calculations, and (c) whether or not your “net calculations” are subject to mutual review, or just the employer’s “total discretion,” which is a phrase that is equivalent to “unreviewable whim.”

Even if you have already been on the job – whether for a day or a decade – ensuring that you know how your compensation will be calculated is critical, because it just might be changed . . . drastically . . . even, perhaps, tomorrow.

WHAT YOU CAN DO: There is an old saying that “Good fences make good neighbors.” We have adapted that to “Good work-related agreements make good work relations.” Simply put, when it comes to Performance-Based Cash Compensation, you would be wise to:

    1. know what language determines calculations of your compensation,
    2. do what you can to remove any “bad language” from any documents or agreements governing your compensation calculations,
    3. try, too, to get “good language” into them, to the extent you can,
    4. see if you can get into any document that governs your compensation calculations a right to review, accounting or audit the calculations in order to keep your employer accountable, and thus more likely to act responsibly, and, if you can,
    5. on a regular basis try to do what you can to avoid, prevent, reduce or eliminate unnecessary costs related to your job that will serve to reduce your “net out” calculations, and thus increase your take-home income.

1. If you don’t know the items that will be “netted” out of your performance-based cash compensation, ask for a copy of the applicable Rules, Plan, Program or Agreement: If interviewing for a job that includes “performance-based cash compensation,” ask your interviewer if you can see their “Commissions Plan,” “Sales Policies,” rules of their “Contingent Compensation” program, or similar-sounding document(s) that will determine what, if anything, you can expect to be “netted out” of your earnings calculations.

If you are on your job just a short while, or if a new compensation plan is introduced, or if an item has been “netted out” of your compensation calculations that just doesn’t seem right, don’t be shy about asking for an explanation.

2. If you are told that no such document exists, ask for a simple written list of the items that may expect to be “netted out” of your performance-based cash earnings, if any, in the course of their calculations.

3. “What if I am asked, ‘Don’t you trust us?’” If you are asked something like “What’s the matter, don’t you trust us?” your best response is “Sure, I do, but my spouse and I make it a point to prepare and live by a rather strict budget. For this reason, we always try to maintain a careful forecast of our respective income streams, and expenses, too, on a regular basis. This information will help me do just that. I hope you understand.”

We offer a Model Letter for Requesting Commissions Earned But Not Paid due to Retroactive Commissions Plan Change, that you can adapt to your own facts and circumstances. It shows you “What to Say, and How to Say It™” just [click here.] Delivered by Email – Instantly!

4. If no Plan, Document or Agreement exists that defines items to be “netted out” of your earnings calculations, and you are not provided with a “netting out” list, you might seek out the experience of others on the job. Use what they may share with you to assess whether or not they are generally pleased with the calculations of their performance-based cash compensation and, too, the items that are commonly “netted out.” In doing so, just the tone of their voices – whether their tone seems laced with cynicism, or entirely calm and trusting – may be very instructive for you on a going forward basis.

5. “Under what circumstances should I be concerned?” Have significant concern if: (a) there exists no written plan or agreement regarding the “netted out’ items in calculation of your earnings, AND (b) despite your request for information, you are not provided with a list of such items to be “netted out,” AND (c) others who work for your employer or prospective employer are not pleased, or are mistrusting, of “netting out” practices of the employer.

On that basis you should perhaps reconsider taking or continuing in such employment. Employers who do not make clear commitments are like restaurants that do not list prices on their menus: lot of their customers will likely to be disappointed.

We offer a Model Letter for Requesting Flexibility when a Commissions Plan is Changed, or an Entirely New Plan is Introduced. New Rules often don’t apply appropriately to existing situations. If a new or changed Commissions Plan where you work does not properly fit your circumstances, suggest an alternative. This Model Letter shows you “What to Say, and How to Say It™” just [click here.] Delivered by Email – Instantly!

6. Depending on your business or profession, it is probably reasonable to “Net Out” at least some items. As an example, if you are a pharmaceutical sales representative, I would consider certain items to be appropriately “netted out” of your “net sales” calculations, including: (a) costs of distributed free samples, (b) reimbursed travel costs, (c) orders that were made, but were later cancelled, and (d) a percentage of travel and entertainment costs.

As another example, for a car sales person, I would think it would be reasonable to calculate her commissions as “gross sales” but to then “net out” the costs of (a) credit reports on the buyers, (b) the cost of CarFax reports provided to buyers, (c) perhaps even some share of the costs of marketing and advertising.

7. Depending on your business or profession, it is probably Not Reasonable to “Net Out” some items. Going back to the case of a pharmaceutical salesperson’s earnings calculations, I would not expect to see netted out from her earnings (a) any share at all of the costs of research and development of the pharmaceutical drugs sold, or (b) any share of the headquarters office rent.

Likewise, going back to the case of a car sales person, I would not expect to see netted out from his earnings calculations (a) any share of the costs of the mortgage on the showroom building, (b) the costs of complying with manufacturers’ safety recalls, or (c) any share of the costs of “general dealership overhead.”

Workplace Document Confusing? Offer Letter? Non-Compete Agreement? Retention Agreement? Consulting Agreement? Confidentiality Agreement? Others? Want it Reviewed and Explained? Get Your Workplace Document Reviewed, Analyzed and Explained to You, with 30 Minutes to Ask Questions. Just email us at [Vanessa@ExecutiveLaw.com.]

8. Be on a watch out for the phrases “sole discretion,” “absolute discretion,” or “unfettered discretion,” or words to that effect, in any agreement, contract, plan or policy regarding earnings calculations. Such words provide your employer the right to do almost anything it wants to do, at any time, for any reason, including denying you what you unequivocally have earned, and unquestionably are now due. These words are the near equivalent of “whatever we feel like that day.”

Asking for modification of the language of any document takes courage, but there is generally no downside to asking, so long as you do it respectfully. Not too many of our clients have been successful in doing so, but if you feel you have the leverage – which usually means you are successful at your job, it is quite possible. The “magic words” you might ask for are something like, “Instead of ‘sole, absolute or unfettered’ discretion, can we use, perhaps, ‘reasonable’ or sensible, or possibly inserting ‘In the instance of a difference of opinion, we agree to review and concurrence by a mutually agreeable third party.’”

9. In any document dealing with performance-based cash compensation, directly or indirectly, look for any words that give you a right to a simple, detailed calculation of your compensation. This is quite important, as without that, you may never receive a clear answer to a question or concern you may have as to the correctness of what you have been paid. If not, then you should consider requesting such a right to an explanation, or such a practice be maintained, on a regular basis.

Monies due you (commissions, bonus, wages, expenses, etc.) owed you by former employer? After leaving, you are free to make your “demand.” We offer a Model Letter Requesting Monies Due You by a Former Employer. Shows you “What to Say, and How to Say It.”™ To obtain your copy, just [click here.] Delivered by Email – Instantly!

10. Knowing what words and phrases will serve you best in earnings calculations will only serve you well in controlling them to your advantage. Just like knowing that too much sugar in your diet is unhealthy, you can make the choice to reduce it in your diet, and maintain your health, knowing what will be “netted out” of your income allows you to reduce them from your daily work habits.

Why not use a lower-cost hotel when traveling, a lower-cost car rental, a lower-cost supplier of credit reports, and a lower cost but pleasant restaurant to entertain customers . . . if it is good for your “financial health?, why not? But first, you need the knowledge.

In Summary . . .

More and more people are compensated on a “pay for performance” basis, as distinct from the more old fashioned purely salary “pay for pulse” basis. But this does expose you to possible problems due to the “netting out” of more items than what you view to be reasonable. So, seek the necessary information, and try to turn it to your advantage. And always seek, as well, the right to know, and the opportunity to object if you see a problem. It is nothing but wise and to your advantage to gather knowledge of what might otherwise be used by your employer to your disadvantage. Yes, “Knowledge is power.”

P.S.: If you would like to speak directly about this or other subjects, I am available for 30-MINUTE, 60-MINUTE, OR 120-MINUTE TELEPHONE CONSULTATIONS, just [click here.] Evenings and weekends can often be accommodated.

SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. For those employees who are compensated in part or in whole based on calculations of performance, what you are entitled to and what you may gain or lose by wise negotiation of them, all grow out of your understanding of what you are entitled to. Standing up for yourself in this context, and on this issue, is nothing less than wise “navigation and negotiation.”

Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.

*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.

Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.

Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the State of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear.  Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.

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