Commission Clauses

Commissions seem to be a sensitive area in the tri-fold relationship between hotels, third-party agents, and the customer.  And often the awkwardness about it comes because there’s a fourth party involved in some of the transactions – the end user.  Perhaps we should define the roles of each of these parties when it comes to booking a hotel for a group.

The Hotel.  Hotels are quite accustomed to quoting commissionable rates.  Travel agents have been booking individual rooms with a commission for years.  A third-party is a group travel agent and hotels are rather used to quoting commissionable rates to them as well.  Industry standard is a 10% commission.  That means that the third-party gets paid by the hotel, and not the customer, for the service of placing the group.  Hotels typically do not raise their rates to accommodate this commission as commissions are usually measured as an expense, rather than something that would affect their average rate.  It is common for a hotel to even document in their contract that rates have not been raised for commission purposes.  This can be used to help put the customer’s mind at ease.  If they were being charged more for using a third-party, why would they?

The Third Party.  The third party generally works for free in the eyes of the customer.  The model works rather well this way as the customer gets the equivalent of an extra staff member who requires no payment.  On the other hand, the third party will be paid by the hotel who is awarded the group as a percentage of room revenue.  This is the only revenue stream of the prototype third-party organization.

The Customer.  This is the person or group who will sign the contract and be responsible for the payment and the execution of the program, whether it materializes or cancels.  The customer is financially liable to the hotel but has no obligation outside of a handshake to the third-party.  Typically, once a contract is signed, the customer and the hotel have a direct one-on-one relationship and the third-party would only get involved again were there a significant issue, an addition, a subtraction, or some other development which would necessitate close examination of the contract once more. 

The End-User.  Here’s where things can get sticky.  Many times the customer, the literal entity who is paying for the conference itself, is not the end user.  Often times, an end user might hire an organization to produce a meeting.  The end user only has a relationship with the customer.  They have no direct contact with the hotel because they’ve contracted the customer to do that.  And they certainly don’t have a relationship with the third-party.  The big difference here is that the end user will have assuredly heard of hotel, and will be exposed to the hotel, but they might never hear of or be exposed to the third party.  And since the customer hired the third party for no cost, they often see no need to disclose to the end user that they’ve used a service that makes their job easier. 

Why can this fourth party relationship be awkward?  Because in many instances, though the end user doesn’t sign the contract itself, they are privy to it.  And if they’ve hired the customer to produce their meeting, seeing a third-party they’ve never heard of on the document can raise unnecessary questions about how the customer does its business.  And it’s why the customer might ask the hotel to leave the third-party commission clause off of the contract.

Hotels are not inclined to oblige in many cases because this practice is seen as unethical – that keeping the commission clause off the contract is not in line with full disclosure.  I see the rationale.  Though my position is biased because I am indeed a third-party, I don’t see this as unethical. 

My argument is that the end user has hired the customer to produce the meeting, but they haven’t dictated how the customer is to find their sites.  In the same way that the end user doesn’t need to know from who the organization they contracted buy their bottled water, or what training videos they use to keep their employee morale high, or what insurance covers their staff, or who gets to drive the company vehicle – why does the end user need to know that the customer uses a service to do their site selection? 

When put in this position, I’ve even offered to have my customer sign my own commission agreement so that the hotel is aware I’ve disclosed all that I need to disclose.  It’s my customer who doesn’t want to disclose all to their end user.  This placates the hotel in most cases. 

Do I like when I’m asked to keep commission clauses off of contracts?  No.  If I thought this were a devious, unethical practice, I couldn’t rightly ask it.  Frankly, I feel like I’m having an affair when I do it.  But in truth, I think it’s mostly misunderstood.

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