The rise in prices of a principal’s products is likely to mean the agent is earning increased commissions as a result. Many principals may be wondering how this might affect the value of compensation and indemnity payments in the event of the agency being terminated.
If an agency is terminated and the agent is entitled to a termination payment under Regulation 17, the value of that payment is likely to be affected as a result of the rise in product prices. Whilst an agent’s commissions may have risen, and the performance of the agency may appear to have increased, that increase in performance may be illusionary. As discussed above, despite a rise in commissions, the performance of the agency may have declined.
Instead of typically looking to commission income when calculating compensation, it will be necessary to consider the number of sales. That will ensure the real performance of the agency is captured. A declining agency will, in the case of compensation, attract a lower multiple than a steady agency or one where performance is rising.
Similarly, in the case of an indemnity, any underperformance issues should be identified and reflected appropriately in the calculation of the indemnity payment under Regulation 17. At first blush, it may appear as though an agent has significantly increased the volume of business with certain customers due to price rises of products, when in fact, the number of sales may have flatlined or actually decreased. In those cases, such customers may be able to be excluded from the indemnity calculation. A failure to hit sales targets could also be used as an argument that the payment of the full amount of an indemnity is not “equitable having regard to all the circumstances” (which is one of the factors stipulated in Regulation 17).