Why Agents Should Insist on Evergreen Clauses

EVERGREEN? WHILE I UNDERSTAND this classification to be for plants and shrubs that bear foliage throughout the year, I had no idea what evergreen meant in the context of telecom when I entered the industry four years ago. I soon learned that in business circles, evergreen typically means a contract that renews from year to year without renegotiation, but in telecom and the channel, specifically, it is synonymous with ongoing residual commissions.

I found it interesting that this type of remuneration was rare. As I began reviewing contracts, I found few contained evergreen language. In fact, most contracts were structured to the contrary. The terms were simple: miss quota, stop receiving commission. I did hear verbal assurances from some providers about receiving ongoing commission, but this was seldom, if ever, backed up by contract terms. I soon realized my company, Telarus Inc., was one of the few master agencies to offer evergreen payments in a standard agreement.

I believe the tide is changing. In the short time Ive been in the industry Ive seen the pendulum of strength swing from the side of the carriers and master agents to that of the subagents. As a result, more master agents are offering a higher percentage of commission to subagents than ever before. Carriers also are offering more generous contracts as well. Ive also seen a few master agents and carriers adopt evergreen language (though sometimes only after insistence of the counterparty). I believe this is a healthy direction for the channel as a whole, and I believe agents should insist upon evergreen contracts in furtherance of this change. And, its the right thing to do.

Most carriers pay on a residual basis, which has great advantages in that they:

This arrangement is a generous offer by an agent as they perform unpaid labor for the benefit of the carrier. The carrier is not obligated to pay an agent as they would a full-time employee who, I might add, may choose to spend time on the clock playing Solitaire, browsing Yahoo! news or watching videos on YouTube. A carrier has agreed to pay the agent who submits an order that passes credit, successfully installs and becomes a paying customer. The agent, therefore, has placed an enormous amount of trust in the carrier that he or she will be paid. This is a tremendous risk to an agent as the payment for a sale made today will not begin to pay for at least three months and will not be paid fully for several years. The agent must wait and hope the carrier will compensate him/her for the work performed. This is essentially an interest-free loan for the labor provided by the agent.

Cutting off the expected payment is tantamount to defaulting on a debt owed to the agent. Labor performed continues to benefit the carrier, but that laborer is not compensated for his efforts. This is akin to firing a salaried employee and asking them to remit their last years salary. The thought is absurd because we accept that past compensation was for past service performed.

How then is an agents compensation different? The agent performed the services as would a salaried employee, but is at a disadvantage because he or she accepted an agreement wherein compensation is paid at a future date.

Termination of an agents commission by a master agent or a carrier effectively results in a financial gain for the carrier or master agent. Less commission to the agent means greater margin for the carrier or master agent. How strong is a partnership in which one partner will gain by the other’s loss?

This scenario reminds me of a term used within some network marketing companies (read: pyramid scheme) called breakage. Breakage results when a distributor fails to qualify for commission payments by missing the sales quota for magic beans, youth elixir, snake oil, etc., or failing to meet another objective. Once that agent fails to qualify for commission, the company retains commission. Anyone who has worked for, or knows someone who has worked for, such a company knows that breakage must occur for the company to make its margins because the compensation plan is so generous and enticing that there simply wouldnt be enough money to go around to all distributors.

Carriers and master agents are different from these network marketing companies in that their margins do not depend on the failure of agents and the withholding of commissions. Carriers and master agents set up commission plans to entice agents to sell but still remain profitable as a company. Their margins, therefore, do not depend on breakage. Why then is the possibility of breakage built into most agent contracts? Does the constant threat of great loss spur greater efforts? I think not. Agents are independent and choose each day where they will place business. The seasoned agents know that a nonevergreen contract incurs risk commensurate with their increasing revenue under that contract.

I believe choice of an evergreen commission comes down to whether or not the agent deserves to be paid for the work theyve performed. Agents should demand this, especially now that the climate is in their favor.

Adam Edwards is CEO and founder of master agency Telarus Inc., parent company of ShopforT1.com, a provider of real-time T1 quotes. Telarus has been named a top producer for providers such as ACC Business, Broadwing, UCN and others.