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As a follow-up to an article examining split commissions that appeared in the February issue of Agency Sales, this month consultant Glen Balzer discusses best practices for both manufacturers and their agents to consider.

Until recent time 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 organization under a single roof. With the advent of international trade agreements, globalization, and the expansion of contract manufacturing, the various points of contact have been scattered to remote locations in different cities, states or countries.

In many cases, an individual salesman or manufacturers’ representative cannot service all remote sites involved with a sale. In order to align all of the disparate sales reps toward the common goal of closing sales for a single supplier at an individual customer, a supplier must organize a program that motivates all reps simultaneously. The technique that accomplishes that objective is commission splitting. There may be up to three sites involved in the sale of components from a supplier to a customer. Suppliers and manufacturers’ representatives alike must ensure that the representative agreement thoroughly explains how the supplier divides sales commissions between two or more reps. Following best practices discussed here can promote better performance while reducing strife in supplier-sales rep relationships.

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 or chooses a standard component from a catalog. The rep’s task at the Point-of-Design is to convince the customer 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. Such effort creates 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-Purchase is the location where the manufacturers’ representative provides support to the buyer; where the customer negotiates purchase contracts and writes purchase orders.

Point-of-Manufacture

In today’s world of globalization, manufacturing is probably located 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 customer receives the goods and integrates those goods into its finished manufactured product. A customer needs a manufacturers’ representative at this location 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. In order to achieve customer satisfaction, the disparate sales reps must work in harmony as an integrated team in concert with the supplier.

Not all customer sites provide feedback to the supplier with equal ease. Quite often, a customer communicates a problem at one site to the rep at another site. Manufacturers’ representatives must frequently communicate amongst 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? A supplier and its representative contracts must encourage multiple reps to work together. A smoothly functioning split commission program is the tool that brings about cooperation between sales reps at different sites. The supplier may split one-third of commissions for Point-of-Design; one-third for Point-of-Purchase; and one-third for Point-of Manufacture. If a rep at a particular location performs the heavy lifting, it increases its relative share of the total commissions while diminishing others. Design sites frequently earn half or more of the total commissions paid.

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

• First, sales management must have the authority to determine which customers will be involved with commission splits. Exclude minor customers from split commission programs, since the cost of managing the split program may exceed its benefit. Sales management must determine the ratio of the split among the three manufacturers’ representatives and have the power to implement the ratios among the reps.
• Second, the sales organization and the finance or accounting departments must track the sales to customers involved with commission splits, provide sales data to all applicable reps and pay the reps accordingly.
• Third, the representative agreement must state that the sales executive for the supplier has the final word on commission splits. Without plain language depicting the authority of the supplier sales executive to decide how to split commissions in special situations, continued airing of commission disputes can too easily undermine sales productivity.

Preparing for the Inevitable: Commission Disputes

Even the best-written and best-implemented split commission program will ultimately become the target of a dispute. Irrespective of whether a claim is valid, one or more of the manufacturers’ representatives involved ultimately feel shortchanged. 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 100 Percent Rule

In order for suppliers and sales representatives to have a solid shot at a successful partnership, they must pay attention to two rules when negotiating representative agreements:

• First, whenever multiple manufacturers’ representatives are competing for a slice of the commission pie, there will be a struggle among reps trying to optimize their individual slice. Ensure that the sum of commissions paid to all reps involved in a sale does not exceed 100 percent of the commissions normally paid on a single location sale. Violation of this rule invites reps to seek an ever-increasing slice of the commission pie.
• Second, suppliers occasionally attempt to trim a rep’s commissions in situations where reps were not directly involved at all of the points of design, purchase, and manufacture. The suppliers’ logic in these cases is that if the supplier performs the sales work at a point of design, purchase or manufacture, the reps in aggregate should not receive the full 100 percent of the commissions usually paid in a single location sale. Setting up a scenario where the rep competes with its supplier partner for commission income cannot improve the supplier-sales rep relationship. Although reps usually agree to share commissions with fellow reps in other territories, reps rarely agree to a representative agreement in which it must share commissions with its supplier. Don’t allow the sum of commissions paid to fall below 100 percent of the commissions normally paid on a single location sale. Supplier-sales rep relationships yield best results when reps don’t view suppliers as competitors for their commission income.

Conclusion

Ensure that all manufacturers’ representatives involved with selling to the most important customers share commissions in a well-defined policy in the rep agreement. The sum of commissions paid in multi-location selling should neither exceed nor fall below 100 percent of normal commissions paid on a single location sale. The sales executive must have final authority over splits if reps disagree about their individual share of total commissions. Adhering to these best practices reduces both supplier and rep distractions in the selling process.

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