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The back and forth between principals and independent manufacturers’ representatives concerning the payment of commissions in cases where buying decisions have been made across several territories never seems to end. A recent conversation on the MANA LinkedIn discussion page points out that while some resolution has been made in some cases, it’s a matter that remains a constant for agents — and their principals.

When a manufacturer, who works with agents, introduced the subject, here’s how the discussion proceeded: “What is an appropriate way to address a rep that has a potential sale in another’s territory? Rep ‘A’ had a customer in a territory (Illinois) from a previous employer, now it is not his territory with his new principal. The current Illinois Rep ‘B’ has not done business with the actual customer in his territory. Are there any conditions to a situation such as that? Do you follow strict territory guidelines? Do you offer split commission, etc.”

If any proof was needed that this was a timely matter of discussion, independent agents were quick to offer their opinions.

“This has happened to me more than once. In each case I told the principal that it was unethical to cut out the territory rep from the commission. I contacted the territory rep and offered him 20 percent of the commission if he would sign a sub-rep agreement with me. The territory rep agreed in all but one case after which I felt it was not a breach of ethics to get the account for the principal. In a situation where the territory rep was calling on the customer but not making headway, I offered a 40 percent split of the commission.”

“Full commission on the first order, split commission after the customer is set up for a specified period of time. Then commissions revert to the territory rep as they assume responsibility for servicing after sale.”

“As a rep, I would expect that the current rep within the territory would receive ‘destination’ credit (20 percent, maybe 30 percent of the total commission) plus ‘order placement’ credit, if applicable (maybe 10 percent), and the other rep would receive the balance.”

Speaking directly to the manufacturer, another agent said, “You are touching a sensitive area for reps and I have seen this handled many different ways. Your specific case is clearly due to the relationship the new rep had with this customer. It does sound like you might be in the capital equipment side of the rep business and there might be more room for sharing a commission. If there is the need for follow-up, service and support of the equipment, there might be a way of utilizing your local rep and getting him as part of your company’s growth at that customer.

“There are many ways to split a commission, but your key as a principal is to keep your reps motivated to sell for you. Our motivation — as reps — comes from our successes and those commission checks. I used to push principals for a standard policy for splitting a commission; some have and some have not and choose to do split commissions based on each individual case. I am an OEM rep and commissions are not that of a capital equipment rep as we have repeat (we hope) sales compared to a single-sale transaction.”

“I have been on both sides of this issue — as vice president of sales for a contract manufacturer and now as an independent rep. You, the manufacturer, have to decide this issue. Hopefully, both of these reps work for you, and you have contracts in place with each of them with a clause in it covering split commissions. If so, follow the percentage guidelines for split commissions. From your description, it sounds like the sale may not have occurred for the new rep if the old rep had not had the relationship with the customer. That relationship is of value and the ‘specifying rep’ should get some compensation for his efforts. One thing is sure — the situation will reoccur and often in the opposite direction. Fostering good working relationships among your reps is critical to everyone’s success.”

And finally, an attorney noted, “It (split commission) is typically addressed by the manufacturer, not by the reps between themselves. Of course, there often is a split commission clause in the rep agreement between the sales rep and the manufacturer.”

Splits Happen with Frequency

Tom Leslie is no stranger to experiencing split commissions. Leslie, Thomas M. Leslie & Assoc., Arcadia, California, explains that “given the nature of the business that we’re in, instances of split commissions seem to happen more and more. It remains one of the more difficult situations I’ve faced as a rep. If we all lived in a perfect world and there was one person — a king — who made all the rules we’d live by, then that would be a great way to handle split commissions. But as any rep knows, that’s not the way things are.”

Leslie, who has more than 30 years of experience in technical sales and consultation in aerospace, defense and medical industries in California, Arizona, and Nevada, continues, “Here’s what I’ve encountered. You’ve got some principals who want to ignore the problem and treat the situation ‘old school.’ By that I mean if the order is shipped to your territory, then you get the commission. I find that approach to be completely unacceptable.

“I’ve made it a practice to discuss the possibility of split commissions with prospective principals. Personally, I’ve always felt that a fair way to deal with split commissions is that the originating rep — the rep involved in the start up and design of the project — should get the majority of the commission. When you consider the potential timeline in the process, that startup and design part can take up to three years or more. The rep has to be able to recoup all the work that was done at the beginning.”

Approaches Vary

When the possibility of split commissions presents itself to an agent, Leslie says reaction on the part of the rep can vary. “I don’t mean to be evasive here, but it really depends upon the rep. Consider, for instance, some reps who want commissions for the life of the project. Given that some aerospace projects can last upwards of 20 years, that can be unreasonable.”

He continues that in some instances, principals are the best ones to determine how a commission should be split, but “really it all comes down to a case-by-case basis. I used to say I’d like some sort of a formula to be developed that would work in these cases, but given all the variables involved, that’s not really possible.”

When all things related to split commissions are considered, Leslie says there are some constants that both principals and agents ought to keep in mind.

“Considering the principals first,” he says, “their focus has to be on keeping their reps motivated to continue the work. You always want the rep to continue generating new business and keeping the customer happy.”

What the rep must keep focused on, he continues, are a couple of things. “There’s always the potential for the principal to make an account a national account. When that happens the rep handling the R&D also handles the location the order is shipped to in your territory. Then he gets the commission. I’ve actually had that happen to me and I can’t say I necessarily liked it. In the end, I was successful in renegotiating things to my benefit.

“Then there’s the chance the principal will simply throw his hands up in the air and say ‘You (reps) work it out among yourselves.’ I’ve also had that happen and while it worked out in one case, in the other it did not. What can happen is that the principal runs the risk of upsetting both agencies involved.”

Leslie concludes by noting that split commissions remain a touchy issue. “If I had a preference, I guess it would be that the principal would work it out.”

Advice from the Past

As evidence that split commissions are a concern that never seems to go away, it’s probably worth citing information that appeared in Agency Sales close to a decade ago. At that time, the following areas were urged for consideration:

• Written agreement — Always be sure to get as much in writing as possible beforehand. Even if the subject is only touched upon during a conversation with a principal, it would be wise to follow up — in writing — confirming the details of that conversation. In addition, having a written provision included in the contract would go a long way toward addressing the concern.
• Negotiation — Negotiate prior to the order. It’s after the fact that things get much more difficult. Before signing a contract, it’s always wise to run your agreement with your principal by your attorney. And if split commissions are expected, it’s best to have them negotiated prior to agreeing to take on the line.
• Communication — If the agent knows beforehand that an order is coming down that may call for split commissions, it’s imperative to communicate with the principal as soon as possible. Inform him of the extent of the work you’ve done, even though the order is formally being placed from another location. If you wait, you may find that you wind up with a smaller part of the commission — or worse yet, nothing at all.
• Reaction — Remember that your principal isn’t going to change everything just for you. As a result, it’s important to react in a professional manner; let your principal know all the details of a given situation and urge him to work with you on it.

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