Sales Commission Agreements In NZ: How To Get Commissions Right

If your business relies on sales, you’ve probably had the commission conversation at some point.

Maybe you’re hiring your first salesperson and want to incentivise performance. Maybe you’re scaling and need a consistent way to pay commissions across a team. Or maybe you’ve had a commission dispute already and you don’t want a repeat.

Whatever stage you’re at, getting your sales commission agreements right is one of the simplest ways to avoid confusion, protect cash flow, and keep your sales team motivated.

Below, we’ll walk you through what a sales commission agreement usually covers, common structures used in New Zealand, and the legal and practical issues NZ businesses should think about before commissions start being paid.

What Are Sales Commission Agreements (And Why Do They Matter)?

A sales commission agreement sets out how commissions work in your business, including:

• what counts as a “sale” for commission purposes
• how commission is calculated
• when commission is earned (and when it’s actually paid)
• what happens if a customer cancels, doesn’t pay, or asks for a refund
• how disputes are handled

Even if you have a strong culture and a high-performing team, commission arrangements can go off track quickly when there’s ambiguity. That ambiguity usually shows up when something changes, for example:

• you change pricing or discount rules
• you introduce subscription billing or milestone payments
• someone resigns (or you terminate employment) and there are “in-flight” deals
• the business goes through a restructure, acquisition, or territory realignment

Clear sales commission agreements help you avoid the classic problems: “I thought I’d get paid on that deal,” “I did the work, so it’s my commission,” or “you changed the rules halfway through the quarter.”

It’s also worth remembering: commission is still a form of remuneration. In New Zealand, you’ll often need to think about employment and wage rules (not just what seems “commercially fair”).

Do You Need A Sales Commission Agreement If You Already Have An Employment Contract?

Often, yes.

Your Employment Contract usually sets out the core relationship (role, hours, base pay, termination, confidentiality and so on). But commission plans tend to change more frequently than employment terms, and they often contain the detailed “maths” and conditions that don’t fit neatly into a general employment agreement.

In practice, many NZ businesses handle this by having:

• an employment agreement that says the employee may be eligible for commission under a separate plan; and
• a separate sales commission agreement / incentive plan that includes the detail and can be updated (lawfully) from time to time.

If you’re engaging a salesperson as an independent contractor instead of an employee, it’s even more important to document commission properly. That usually means having a solid Contractors Agreement (covering the relationship and deliverables) and a clear commission schedule (covering payments and triggers).

If you’re still deciding between engaging someone as an employee or contractor, it’s worth getting that classification right upfront, because it affects tax, leave entitlements, control over work, and how disputes are handled.

When Commission Terms Get Risky For NZ Businesses

Commission plans usually become legally or commercially risky when they’re:

• verbal (or “agreed over Slack” without proper detail)
• unclear about timing (earned vs paid)
• silent on refunds, chargebacks, and non-payment
• inconsistent (different deals get different treatment without a documented reason)
• changed without process (especially for employees)

Even a short written document that clearly sets out the rules can save you a lot of time and cost later.

Common Commission Structures NZ Businesses Use (And What To Watch For)

There’s no one-size-fits-all approach. The “right” structure depends on your sales cycle, your margins, whether you sell products or services, and how much control your business needs over pricing and discounting.

Here are the most common commission structures we see in sales commission agreements.

1) Percentage Of Revenue

This is the classic model: a salesperson earns a fixed percentage of the sale value.

Watch-outs:

• Discounts: will commission be calculated on full price, discounted price, or margin?
• GST: is commission calculated on amounts inclusive or exclusive of GST?
• Refunds/chargebacks: do you recover previously paid commission if the customer cancels?

2) Percentage Of Gross Profit (Margin-Based Commission)

Instead of paying a percentage of revenue, you pay a percentage of the profit (after cost of goods or delivery costs).

This can be great for protecting margins and discouraging “discount-at-any-cost” selling.

Watch-outs:

• you need clear definitions of what costs are included in “gross profit”
• it can be harder for salespeople to predict their earnings if costs vary

3) Tiered Commission Rates

Tiered structures increase the commission rate once targets are hit (e.g. 5% up to $100k, 7% from $100k to $200k, 10% above $200k).

Watch-outs:

• make sure targets are measurable and tied to a clear reporting source (e.g. your CRM or invoicing system)
• be clear whether tiers reset monthly, quarterly, or annually

4) Bonuses For Milestones (Fixed Amounts)

Instead of a percentage, you pay a set dollar amount per sale, per lead conversion, or per milestone (e.g. $500 when a contract is signed, $500 when first invoice is paid).

Watch-outs:

• this can encourage volume, but may not align with profitability unless you’ve modelled it carefully
• if your average deal value varies a lot, it can feel unfair (and lead to churn in your sales team)

5) Commission-Only Arrangements

Some businesses consider commission-only, especially for outbound sales or early-stage growth.

In New Zealand, commission-only arrangements can raise extra legal and practical issues (especially if the salesperson is an employee). If you’re considering it, it’s worth reading up on commission-only pay and getting advice specific to your structure.

Watch-outs (particularly for employees):

• minimum wage compliance (this is fact-specific and often depends on how hours are recorded and how pay is calculated over the relevant period)
• record-keeping and pay-slip clarity
• what happens during low sales periods

What Should A Sales Commission Agreement Include?

This is where most sales commission agreements succeed or fail. It’s not just the commission percentage - it’s everything around it.

If you want your commission terms to be enforceable and workable day-to-day, your agreement should be clear, specific, and consistent with your broader contracts and policies. (It also helps to understand what makes a contract legally binding, because commission disputes often boil down to whether the “rules” were actually agreed.)

Below are the clauses and concepts NZ businesses commonly include.

1) Definitions: What Counts As A “Sale”?

Define the trigger carefully. For example:

• Is a sale made when the customer signs?
• When you issue the invoice?
• When you receive payment?
• When the cooling-off period ends (if applicable)?
• When the product ships or the service is delivered?

Different businesses choose different triggers. The key is consistency and making sure your trigger aligns with your cash flow risk.

2) When Commission Is Earned vs When It’s Paid

This is one of the biggest sources of conflict.

You can set a rule like:

• Earned: when the business receives cleared payment from the customer; and
• Paid: in the next pay cycle after the month-end reconciliation.

For longer contracts, you might pay commission progressively (e.g. on each invoice paid), rather than all upfront.

3) Commission Calculation (And The “Maths Rules”)

Spell out the calculation method clearly, including:

• the commission rate (or tier table)
• whether it applies to GST-inclusive or GST-exclusive amounts
• whether shipping, installation, or other pass-through costs are excluded
• whether discounts reduce commission
• how bundles and add-ons are treated

If you use a CRM or accounting system to generate reports, it’s often helpful to state what system/report is used as the “source of truth” for commission calculations.

4) Returns, Refunds, Cancellations, And Bad Debts

Sales don’t always stick. A good commission agreement deals with this upfront.

Common approaches include:

• Clawbacks: if commission has been paid and the sale is later refunded, the commission is deducted from future commission payments (where allowed under the relevant contract and, for employees, only if done lawfully)
• Hold periods: commission is only paid after a set period (e.g. 30–60 days) to allow for cancellations
• Bad debt rules: commission isn’t payable unless the customer pays (or unless the business writes the debt off and makes a discretionary decision)

Be careful to ensure any deductions from wages are handled lawfully for employees (this is where the wording and process matters, and you may need written consent and a compliant process depending on the situation).

5) Territory, Account Ownership, And Split Commissions

As soon as you have more than one salesperson, you’ll need rules for who “owns” a deal.

Your agreement might cover:

• territories (geographic or industry-based)
• key accounts (and who can service them)
• referrals and lead handovers
• split commissions where multiple people worked on the sale

This is especially important if you have sales development reps (lead gen) and account executives (closers), or if you have a strong customer success / renewals function.

6) What Happens When Someone Leaves?

This is the other “hot spot” for commission disputes.

You’ll usually want clauses that deal with:

• commission on deals signed but not yet paid at the time of resignation/termination
• commission on renewals and upsells after the person leaves
• handover obligations to support continuity

There isn’t a single right answer here. The commercially sensible approach often depends on your sales cycle and how much work remains after signing.

7) Discretion, Changes To The Plan, And Avoiding “Moving The Goalposts”

Many businesses want flexibility to change commission structures as they grow. That’s reasonable - but you need to implement changes properly.

For employees, changes to pay structures can become an employment law issue if they’re not consulted on (or if changes conflict with the existing employment agreement). For contractors, you generally have more flexibility, but you still need to avoid unclear variations that lead to disputes.

A common, practical solution is to say the commission plan may be updated, but only:

• in writing
• with notice (e.g. applying from the next month/quarter)
• not retrospectively (unless clearly agreed)

What NZ Laws And Compliance Issues Affect Commission Payments?

Commission structures don’t exist in a vacuum. Even if your numbers “work”, you also want to make sure they work legally.

Some of the key legal considerations for NZ businesses include the following.

Employment Law Basics (If The Salesperson Is An Employee)

If commissions are being paid to an employee, you’ll want to ensure the structure aligns with New Zealand employment obligations, including under the Employment Relations Act 2000 (good faith obligations) and minimum entitlements legislation.

In particular, watch for:

• Minimum wage compliance: commission-only (or low base + commission) arrangements may still need to meet minimum wage requirements, depending on the role, hours worked, and how pay is assessed over the relevant period.
• Leave calculations: commission can affect “gross earnings” and therefore impact holiday pay calculations under the Holidays Act 2003.
• Deductions: if you claw back commissions or deduct for refunds, you need to handle deductions carefully and lawfully (commonly relevant under the Wages Protection Act 1983), and you may need specific written authorisation and a compliant process.

This is why it’s usually not enough to rely on a generic template. Commission plans need to be tailored to how your team actually works and how your payroll is administered.

Tax And Payroll (PAYE, GST, Invoicing)

How commission is paid can affect tax administration.

• Employees: commissions are often treated as part of wages/salary and paid through payroll with PAYE deductions.
• Contractors: commissions are often paid against an invoice under the contractor arrangement, and GST may apply if the contractor is GST-registered.

The best approach depends on whether you’re dealing with an employee or contractor, and how your contract is structured. Because tax treatment can vary, it’s a good idea to confirm the right approach for your business with your accountant or the IRD.

Fair Trading And Sales Conduct

Commission incentives can unintentionally encourage risky sales behaviour (over-promising, unclear pricing, or pushing unsuitable products).

Even if it’s an individual salesperson making the pitch, your business may still carry risk under the Fair Trading Act 1986 if customers are misled.

A good commission structure can help by rewarding the right outcomes (e.g. paid invoices and low churn), not just signed contracts at any cost.

How To Set Up Commissions In Your Business (A Practical Checklist)

If you want to roll out commissions without chaos, a simple process helps.

Step 1: Choose The Right Legal Relationship First

Before you even decide on commission, confirm whether your salesperson will be:

• an employee (with an employment agreement), or
• a contractor (with a contractor agreement and clear scope of services).

This decision affects your obligations, your flexibility to change commission structures, and your risk profile.

Step 2: Decide What You’re Actually Incentivising

Ask yourself: what do you want more of?

• new customers?
• higher deal sizes?
• better margins?
• faster payment?
• longer retention and fewer refunds?

Then build your commission triggers around that outcome. For example, if cash flow is tight, paying commission only after payment is received may be more sustainable than paying on signing.

Step 3: Put The Commission Rules In Writing (Clearly)

This is where a dedicated commission document is useful. Many businesses formalise this through a Commission Agreement or commission plan attached to the main contract.

The document should match how you actually run sales, including discount approvals, refunds, split deals, and reporting.

Step 4: Align Your Operational Systems

Commission disputes often happen because the contract says one thing but the systems show another.

Before launch, confirm:

• your CRM stages match the commission trigger (e.g. “Closed Won” vs “Paid”)
• discounts are recorded consistently
• refunds/credits are visible to payroll
• someone owns the monthly/quarterly commission reconciliation process

Step 5: Implement Changes Carefully (Especially For Employees)

If you change commission structures for employees, you’ll generally want to approach it with care - consult early, document the change properly, and avoid retrospective changes unless clearly agreed.

From a business perspective, it’s also good for trust. Your top performers want to know the rules aren’t going to change after they’ve done the work.

Step 6: Review The Plan As Your Business Evolves

It’s normal to update commissions as your product, pricing, and margins change. The key is making updates deliberately and transparently, rather than patching things ad hoc each time a “weird deal” comes through.

Key Takeaways

• Sales commission agreements reduce disputes by clearly defining how commission is calculated, when it’s earned, and when it’s paid.
• For many NZ businesses, it makes sense to keep detailed commission rules in a separate written agreement (alongside the employment or contractor contract) so the “maths” is always clear.
• Good commission plans spell out edge cases upfront: discounts, refunds, cancellations, non-payment, split deals, and what happens when someone leaves.
• If your salesperson is an employee, commission arrangements can interact with minimum entitlements (like minimum wage, deductions rules, and holiday pay calculations), so it’s worth getting the structure reviewed for your specific circumstances.
• Commission incentives should align with your real business goals (cash collected, margin protected, churn reduced) - not just “deals signed”.
• Clear documentation and consistent internal systems (CRM, invoicing, payroll) are just as important as the commission rate itself.

If you’d like help putting the right commission structure in place (or reviewing your current sales commission agreements), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.