Throughout history, a manufacturer was a self-contained entity. A company would design, develop, manufacture and market a product in a single facility. That company would design a product in one corner of the facility, develop the product close by, place orders for materials in another corner, and manufacture finished products in the rear of the same facility. A salesman calling on the company would interface with everyone in the customer’s facility under a single roof.

With the advent of contract equipment manufacturers, international trade agreements and globalization, the various points of contact have been scattered to remote locations. Those remote sites might be in different cities, states or countries. In most cases, an individual salesperson or manufacturers’ representative cannot be expected to service all remote sites involved with a sale.

There might be three or more manufacturers’ representatives involved. In order to align all of the disparate reps toward the common goal of closing sales for a single supplier at a single customer, a commission program must be organized that motivates all reps simultaneously. Split commissions are the technique that accomplishes that objective.

There may be up to three sites involved in the sale of components from a supplier to a customer.

Point-of-Design

A sale begins with the design of a supplier’s component into a customer’s final product. The point-of-design is the location where a rep works with a customer’s design team to choose a supplier’s component. The customer creates a product specification for the supplier’s component. The rep’s task at the point-of-design is to convince the supplier that the component selected will perform as required. An energetic rep will encourage the customer to take advantage of proprietary features of the supplier’s component that the competition cannot provide, creating a defensible design win. Simultaneously, the rep works hard to disallow competing suppliers’ products from being included on the product specification.

Point-of-Purchase

The customer’s procurement office might be at a remote site. The procurement office might provide purchasing services for a network of customer design sites. The point-of-procurement is the location where the manufacturers’ representative provides support to the buyer, where purchase orders are written and where purchase contracts are negotiated.

Point-of-Manufacture

In today’s world of globalization, manufacturing is likely to be in yet another remote site; likely in another country. This site might be the manufacturing division of the customer or, as is increasingly likely, a contract equipment manufacturer. It is at this location, the point-of-manufacture, where the suppliers’ components are received and those components are integrated into the customer’s manufactured product. A manufacturers’ representative at this location is needed to resolve issues generally associated with on-time delivery, product count and quality.

In order for a customer to be satisfied with the components from a supplier, that customer must be satisfied with the activities at the point-of-design, at the point-of-purchase and at the point-of-manufacture. Dissatisfaction at any single site translates to dissatisfaction with the supplier, clearly something to be avoided. In order to achieve customer satisfaction, the disparate manufacturers’ representatives must work as an integrated team in concert with the supplier.

Not all customer sites provide feedback to the supplier with equal ease. Quite often, a problem at one site is communicated to the rep at another site. Manufacturers’ representatives must frequently communicate among themselves in order to resolve supplier issues with the customer. A well-managed split commission program acts as a lubricant in those communications. If the program does not work smoothly, information exchange between the reps ceases and customer dissatisfaction rises.

Commission Tracking

How does a supplier ensure customer satisfaction at all three sites? All three manufacturers’ representatives must be encouraged to work together. A smoothly functioning split commission program is the tool that brings about cooperation between those three manufacturers’ representatives. The total commissions may be split one-third for point-of-design; one-third for point-of-purchase; and one-third for point-of-manufacture. Depending upon the amount of work performed at each site, the split could be adjusted in order to favor the site where the heavy-lifting occurs. Design sites are frequently afforded half or more of the total commissions paid.

Commission splitting programs are not free. In order to implement them, two functions must be in place:

• First, sales management must have the authority to determine which customers will be involved with commission splits. Minor customers may legitimately be excluded from a split commission program because the cost of implementation exceeds its cost. Sales management must determine the ratio of the split among the three manufacturers’ representatives and have the clout to implement the ratios with the reps.
• Second, the sales organization and the finance or accounting department must track all of the sales to customers involved with commission splits, provide sales data to all applicable reps, and pay the reps accordingly.

Preparing for the Inevitable: Commission Disputes

The best-written and best-implemented split commission program will ultimately become the target of a dispute. One or more of the manufacturers’ representatives involved ultimately feels as though it is not being fairly compensated. When a dispute arises, it is imperative to have a dispute resolution procedure in place. Such a procedure can be either a documented policy that is already in place, published and understood by all reps, or an ad hoc decision made by a designated sales executive, or a combination of the two. A written policy is preferred since it helps to minimize conflict. It is critically important to stand by commission-split decisions once made. Otherwise, enterprising reps will discover inconsistency and begin challenging all split rates.

The Absolute Rule

Whenever multiple manufacturers’ representatives are competing for a slice of the commission pie, there will be a struggle for each rep to maximize its slice. The absolute rule to remember when splitting commissions is that the sum of commissions paid to all reps involved in a sale will total no more than 100% of the normal commission that would be paid on a single location sale.

Editor’s Note: It should be noted that while the author of this article maintains that “the sum of commissions paid to all reps involved in a sale will total no more than 100% of the normal commission that would be paid on a single location sale,” a different view of the matter was offered in the September 2005 issue of Agency Sales magazine. In his editorial (p. 4), MANA President/CEO Joe Miller asked why reps working together in three territories would be willing to agree to “a one-third split of the industry’s standard rate of commission.” Indeed, he continued, “Maybe it will be necessary to increase the rate of commission in all split credit situations in order to insure an adequate response.”

Conclusion

In today’s era of globalization, most all customers have spheres of influence in multiple geographies. All manufacturers’ representatives are very familiar with commission splitting algorithms. It is imperative for all suppliers to have a split commission policy in place and well-documented. The policy must be administered by people who thoroughly understand it and who implement it impartially. The people responsible for implementation cannot waver once decisions are made.