Commissions as we know them in the sales business are the payment we receive from a principal for conducting business with their products to our customers.

Many manufacturers have a hard time understanding a sales commission arrangement because the people that manage the company are paid on a salary that is a guaranteed amount of money paid to them on a regular basis. Commissions are variable. If we don’t sell anything, we get paid nothing. If we sell a lot, we get paid a lot.

In our current economic times, many manufacturers have to scale back their operations to match the demand for their products. Laying off plant people, closing plants, firing mid-management people, etc. are ways they cope.

Another way manufacturers try to improve their bottom line is going after the sales agent’s commission. I have never understood this rational, as the salesman is the lifeblood of the manufacturer. Cutting a salesman’s commission is like telling a carpenter he can’t use a hammer to build a house.

How many times have you had a principal say “after review of our profitability, we find it necessary to cut your commissions from say 5% to 4%? We are only cutting you by 1%. No way, this is a 20% cut in our overall revenue. My question back to them is: Have you taken a 20% cut in your salary; or, out of all the services we perform for you, sales, order entry, credit collection, literature and price sheets, etc., which of these services do you want me to cut back 20%?

Commissions are usually a fixed cost to a manufacturer. If they pay a 5% commission, it is 5% regardless if it is on $100,000 or $1,000. All other costs are variable

Sales agents–regardless if they are a one-man agency or a 100-man agency–have the same variable overhead costs as the manufacturer. Wages, health and liability insurance, rent, auto, taxes, and more. So taking a 1% sales commission cut, or in reality a 20% revenue cut can greatly affect the ability of the sales agent to operate and do what they do–create sales for the manufacturer.

Another area that many manufacturers don’t understand is getting paid on a timely basis and getting an accurate accounting of the commissions paid. Running a sales agency is business. No longer can you just cash the check and go about your business. The IRS wants to know how you got paid and for what. That is why it is so important to get an accurate commission statement showing the customer, invoice number, location, date, gross and net sales amount, and commission paid.

We are a real proponent of getting this information on a set day every month electronically and payment via electronic deposit, which eliminates the float time with snail mail.

There will always be issues between the sales agent and the manufacturer regarding commissions, but a good open relationship and understanding of what we do for them and for what remuneration , and having this written down in an equitable straightforward contract, will make for good working partners.