Managing Sales Agents

The UK Bribery Act has driven the development of new ethics and compliance teams in many companies and has greatly increased the scrutiny by many organisations of those third parties that work for them. The new due diligence world has taken off and mountains of paper and electronic files are starting to gather inside organisations with details about third parties.

Much of the due diligence will be a complete waste of time. If organisations fail to think about risks or filter their due diligence efforts carefully, they will find themselves losing the wood for the trees. Many due diligence red flags go unchecked or wilfully ignored.

The best organisations have good filtering systems, do due diligence in proportion to risks and focus their most active searches where it is most needed on high risk intermediaries, such as sales agents.

But even in the best organisations there is still great uncertainty about the controls of agents, in particular how much they should be paid. The best due diligence systems might well be used with agents to:

• Show that the organisation knows its agent: who owns the company, how it is structured, who else it works for
• Provide evidence of reference for the agent, to show that other bona fide organisations will work with that agent
• Ensure that training of the agent has been undertaken
• Ensure that ABC clauses are in the agent’s contract,
• Confirm that the agent is confirming by signing regular compliance certificates

What these systems typically fail to address is how much to pay an agent. This is at the heart of bribery risk. The strongest controls over an agent are pointless, if the amounts of money paid are eye-watering and, in front of a prosecutor, have bribe written all over them.

There are a number of principles which need to be considered in setting pay for agents. The safest structure from an ABC point of view is to pay the agent a regular salary and be done with it. It is interesting to note that the companies that have been prosecuted for paying bribes through agents seem to conclude, after the prosecution, that the only safe way to proceed is to avoid agents all together and to employ sales staff on a salary instead. But many companies will scream against this idea and say that incentivised pay is essential (1) to encourage the employee to make the effort to win the deal and (2) to avoid paying salaries and wasting money unnecessarily.

One of the best ways of removing risk from an agent’s deal, is clearly to move to a salary type structure. However , if this feels like a bridge too far, an acceptable halfway house is to avoid any ‘success fee’ only deals. Success fee deals are very high-risk. They tend to be highly incentivised (a very large sum of money or nothing) and present an obvious ABC risk, particularly if combined with a high-risk environment. In fact it is striking to note that these types of success fee deals are only seen in high-risk markets and sectors. It is hard to imagine a US or UK sales agent being needed, let alone one who works only on a success fee basis.

One way of managing this is to mix success fees with a retainer. By reducing the success fee and paying a retainer, a company can remove some of the ABC risk. By paying a retainer a company can get a more stable relationship with the agent. The company can and should set out a clear work plan for the agent that justifies the retainer payment.

Written objectives and plans for an agent are crucial. In all too many instances, companies leave themselves very exposed to ABC risk by not setting out clearly what the agent is supposed to be doing for the money. By setting out clear and regular deliverables, companies will get better service from agents and will also reduce ABC risk.

Any success fee element should have a justification in writing. All too often companies fail to think through the logic of the success fee and the case for it. A justified rationale might include elements such as: the frequency of the sales opportunity (some defence contracts are a once a decade opportunity for example), the probability of success (much more likely with an existing client than a new client); the cost of an equivalent high value professional in that market; the number of hours/days that are expected to be worked; the complexity of the sales tasks. Standing in front of a prosecutor with a contract that has a written justification is a lot more comfortable than having a contract with just a large number in it.

But in the end, the amount of money to be paid is a crucial element in terms of ABC risk. Having some type of sliding scale makes sense. In one of GoodCorporation’s recent client discussions we proposed a table of rates (together with all of the other controls set out above). This was in a sector with annual sales opportunities, but very competitive and a probable 1 in 5 chance of winning. The rates we developed are illustrated in the table below:

Sales Agents' Commission

Our logic was to allow commissions to rise, as the sales value rises, but to reduce the percentage commission. We then put in place a ceiling for the agent’s success fee. We argued with the client that in its case a $500k ceiling was reasonable and that allowing a success fee above this amount, for its sector, activities and risk profile would be unacceptable and not easy to justify in front of either the DoJ or SFO. We added the logic, to help the compliance team to manage annoyed sales colleagues, that amounts higher could be acceptable, but that a full board agreement should be needed for any success fee to be negotiated above this amount.

We don’t believe that this logic is perfect, but it provides comfort to the ethics/compliance team and to the board that the agent’s fees are properly controlled. It also protects the company against over aggressive agents that are trying to negotiate higher fees and gives the sales team and the compliance team a firm negotiating position. It allows the board to have oversight of any one-off large success fee deals before the contract is signed with the agent.

Overall we see this type of restriction of success fees, moving towards a mixed retainer/success fee structure as an essential step to reduce risk. Putting in place the type of rate table illustrated here and written rationale for payments provides a core part of any ‘adequate procedures’ defence. However, our recommendation would be that companies work towards eradicating agents and move towards an in-house sales structure, as a more foolproof way to reduce ABC risks.

Good Practice Points:

1. Undertake thorough and documented due diligence
2. Have ABC clauses, compliance certificates and monitoring as part of the contract
3. Do ABC training for agents
4. Have gifts and hospitality rules for agents
5. Write a documented rationale for the agent’s pay
6. Benchmark the pay in terms of local senior professionals, probability and frequency of sale
7. Have a written programme of work for the agent with regular deliverables documented
8. Have a pay rate table and stick to it
9. Move towards retainers and away from success fees
10. In the long term – eliminate sales agents!