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When a manufacturer asked for some guidance from MANA on his policy of reducing commissions as sales increased, he certainly got an earful from several MANA members. That input, which appeared in MANA’s LinkedIn discussion group, could prove valuable to other manufacturers as they encounter push-back from their reps in similar situations.

Here’s how the situation was described — The principal asked what the usual commission policy is for a situation like this: Their policy calls for a 1 percent decrease in commissions for every $500,000 in sales.

The first rep to take on the subject matter predictably began with, “Talk about disincentive. Somebody should have a chat with this principal and let him know that his sales reps, being human, have figured out that it is worth more of their time to work with a principal that doesn’t have this policy. Also, it is to their advantage to make sure that all orders are less than $500K. If he wants to see his sales grow by leaps and bounds, he should drop this policy and turn his reps loose to make as much as they can.”

Most reps and well-informed principals shouldn’t be surprised that this was hardly the end of the discussion. The next rep offered, “I was negotiating with a principal and this is how they stated the commission structure:

• Sales less than or equal to EAU of 50,000 pieces at five percent.
• Sales less than or equal to EAU of 100,000 pieces at three percent.
• Sales less than or equal to EAU of 200,000 pieces at two percent.

“First, I told them that the way it is worded, they will be paying 10 percent on sales of 50,000 pieces or less. They said ‘No, it’s 5 percent for 50,000 or less, 3 percent if it’s 50,000 to 100,000 and 2 percent for 100,000 to 200,000.

“So then I asked is it 5 percent for the first 50,000 and then 3 percent for the next 50,000 and 2 percent for the next 100,000? Again, the answer was no. So I told them that this is completely illogical. If I sold 40,000 pieces at $1 apiece, I’d make $2,000. But if I sold 60,000 pieces, I’d only make $1,800. They told me that they understand that but this is how they do it and they have five reps who have agreed to it without any complaints.
“I told them they have five fools representing them and that I don’t care to make it six.”

Commenting on the “five fools” reference, another rep noted, “Unfortunately there are too many reps who will take a line like this because they need the principal or because they have an immediate application. Unfortunately, they fail to see the down side until they are locked in. My experience is that if a principal is unreasonable at the beginning, there is almost no chance they will become reasonable when there is money to be divided. I’ve learned to walk away. In the long run, I’m sure it was always the right course of action.”

Another rep agreed that the approach cited above seemed to be illogical. “This illustrates the illogical way some manufacturers look at representatives’ compensation — paring down commissions ultimately will hurt their results in the long run. It seems that more thinking like this sprouts in a bad economy, when, in fact, an opposite approach is where they will get positive results.”

More Negatives

That was hardly the end of the negative response. Another rep offered, “After reading this, I am not sure who I feel most sorry for, the rep or the principal. This reverts back to the old problem of principals focusing on what they pay the reps as opposed to the magnitude of the sales produced by the rep. The message from the principal to the rep in this case is quite clear ‘After a certain degree of effort on our products, we would like to encourage you to spend time promoting your other product lines.’”

An interesting perspective was offered by another rep who has also spent time as a manufacturer. He said that “I am of the opinion that the manufacturer should be happy to write commission checks — and the bigger the better (and I’ve been both national sales manager and independent manufacturers’ representative). On large capital equipment contracts, my experience is the manufacturer’s margins tend (but not always) to decrease dramatically as the contract grows larger. It is reasonable to expect a proportionately lower commission on low-margin contracts, possibly to the point where it is no longer worth the rep’s time, effort and money. Typically, I’ve seen ‘full’ commission paid up to about $100K contract value, and then it starts decreasing at that point. Unacceptably low commissions are definitely a disincentive to the rep. Reps (and principals) need to focus on their own sweet spot to maximize their earnings. The rep and the principal may not share the same sweet spot, and in those cases maybe the rep should walk away and find something better. I’ve said it before, but it’s worth repeating that I think it is more a matter of the principal’s attitude — a customer-friendly principal will tend to be rep-friendly as well, and vice-versa. An unreasonable commission structure indicates a not-so-friendly attitude toward customers.”

While generally agreeing with the above comments, one rep countered with the following view: “While I fully agreed with you that the manufacturer should be happy paying large commissions on large volumes of business, unfortunately I have never, in 22 years, found this to be the case. As soon as the commission checks get above $100K, the problems with the principal begin. Even with so called iron-clad contracts, you still have to resort to legal means to try to recover what you are owed. I’ve just been though such a scenario and it was painful. I’ve seen even the most ‘rep-friendly’ principals decide at some point that the rep’s commission is ‘excessive’ and should be reduced or the rep’s contract cancelled. While I love the rep business, this is the one downfall of the way we do business. I have never refused a reduced commission when the principal needed to reduce pricing to get the order. But, some principals think that they are entitled to cut a commission just because the earned commission is large.”

Reluctance To Pay Large Commissions

That rep was hardly alone in citing his experience with a manufacturer’s reluctance to sign large commission checks. According to another rep, “I often encounter issues with the principal once the yearly commission exceeds the $100K mark, and I begin to see the early warning signs with some companies when the $75K region is reached. Thus, backselling becomes even more important.

I too agree with the assertion that the principal’s happiness quotient should be proportional to the magnitude of the numbers written on the commission check; however, the reality of the situation is that beyond a certain value they quite naturally start thinking that they could have a full-time employee for that and get even more sales. One ex-principal of mine terminated my contract once I exceeded $75K for the year based on the false (but common) reasoning that I had five product lines and if this is what I could do only working one day a week on his product line, it made sense to go direct. He did, and hired a salesperson for $100K, plus benefits, car and office. Their sales dropped by two-thirds. (And yes I am old enough to be professional, but young enough to gloat.)

“The bottom line here is that once a rep’s commission from any one principal starts approaching that of a full-time employee, it is only natural for the principal to start reevaluating their sales costs and sales channel. We all know this, and this is why our success is one of the most common reasons for losing lines.

Consultants Weigh In

Discussions such as this are fodder for opinions from industry consultants. One consultant expressed the opinion that “This case study is indicative of a poorly run organization — one focused on lowering (perceived) costs and not on growing sales and profits. Scenarios such as this are quite frustrating. They are put in place by individuals with no comprehension of effective, and fair, compensation plans.

“I’ve seen plans where reps were offered a lower rate for sales to distributors vs. sales to dealers. In this case, the reps were actually ‘penalized’ for securing the larger stocking orders from distributors. It made no sense because these large orders were absolutely essential to the manufacturer’s survival. And, as a result, monkey business ensued whereby the reps would attempt to classify bona fide distributors as dealers to obtain the higher commission rate. Or they avoided distribution accounts entirely.

“Conversely, there are many examples of successful rep compensation plans where the commission rate is increased as various plateaus are achieved and exceeded. This is put in place when the principal understands the value of a rep force and is interested in providing an incentive plan to them.”

Finally, a second consultant weighed in with these thoughts: “Basically, there is significant value with a rep taking the time to build trusting customer relationships over years of multiple-line selling at little or no up-front expense to the manufacturer. Furthermore, we are only discussing large accounts when arguing over large commissions — that $2 million customer expects $2 million worth of service — how can that be supported without some cost in terms of support personnel, while at the same time soliciting more new business?

“Furthermore, keeping a large account is significantly more difficult than people think. Why? How did you get the account to begin with? You chased it hard until the competitor slipped and you took the opportunity to score. Well, not only does the guy who lost out want that back, now you are the one others are trying to get the account from as soon as you slip — and everybody slips. It takes time, work, and expense to cater to the customer’s expectations, prevent falls, and be there to manage the slips.

“A more proactive — and realistic — discussion should center around how the manufacturer can support the rep to add personnel at some dollar volume in sales to cater to the growing market needs and the demands for continuous growth, as well as bring in new blood to the rep world. That is a significantly better overall win-win-win (customer-manufacturer-rep) in the long run. The bottom line is commissions should never be cut based on dollar volume — they should only be cut when margins shrink due to competitive pressures and it is negotiated up front with the rep.”