Many moons ago, when I was a recruiter for a software company, I brought an applicant in that was highly regarded. In the interview process, he told us a story of why he was no longer with the very well-known company with whom he had been employed. He told us of about a commission agreement that escalated the more you sold. He signed it, the company signed it and everyone went happily along their way. Then he sold a deal with a large government organization for MILLIONS of dollars worth of software and the company started calculating what his commission was to be and they were aghast. They told him they could not pay him that much in commission. He told them that was the contract that he signed. They reneged, he resigned and sued them and still ended up with the commissions due him. The company ended up with an expensive lesson, suspicious employees, and a big lawyers’ bill. It was too bad another company didn’t get a chance to hear this story.
More recently, according to David Leishman of McGuireWoods LLP, Panera, LLC made a similar mistake. In order to recruit top-notch managers, they promised restaurant managers a bonus program that was very specific. According to Leishman:
“…qualifying managers were eligible for a one-time bonus payment based on a formula. Store profitability was a significant factor in determining the amount of the bonus. General managers signed agreements under which the bonuses would be paid about five years after execution of the agreement, provided the general manager was employed on the date on which the bonus was payable.”
After the agreements were in place, Panera figured out they would be too expensive and capped the bonuses at $100,000. As you might expect, the managers also did some math and found out that some of them would be shorted a great deal of money. They sued and won.
Both the district court and the 8th Circuit court said: “…that an employment relationship is a unilateral contract under Missouri law.” According to Leishman, “…the court also rejected Panera’s argument that it expressly reserved the power to revoke or modify the offer by conditioning the bonus payment on the general manager’s continued employment and reserving the right to adjust the bonus metrics.” They said, and this is the important part of the lesson, that Panera might have had that right if they had expressed that in the agreement, however, they did not, and subsequently had their argument rejected. Thus they had to pay out large amounts to the managers.
The lesson learned from both of these stories is that bonus or commission programs should be clearly written in order to allow companies to change the programs midstream. In reality, I think that companies should make sure that the consequences of any bonus or commission plan should be thoroughly thought out prior to instituting them. Do some “what if” scenarios where you consider what happens if someone totally blows the numbers through the roof. Even better, be glad that an employee brought that much to the company and reward them handsomely. Be glad they are on your side and not with a competitor, which they will surely be if you screw them over on a commission or a bonus.