How to Manage Sales Reps’ Split Commissions

Until recently, 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 salesperson calling on the company would meet everyone in the customer’s facility under a single roof. With international trade agreements, globalization, and expanding contract manufacturing, the various points of contact are scattered to remote locations. Those remote sites might be 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 the disparate reps toward the common goal of closing sales for a single supplier at a single customer, a supplier must organize a program that motivates all reps simultaneously. Commission splitting is the technique that properly motivates the reps. Two or three sites may share responsibility for the sale of components from a supplier to a customer. Suppliers and manufacturers’ representatives alike must make sure that the representative agreement thoroughly explains how the supplier divides sales commissions between two or more reps.

Point-of-Design

A sale begins with the design of a supplier’s product into a customer’s finished goods. The Point-of-Design is the place where a rep works with a customer’s design team to choose a supplier’s product. The customer creates a product specification for the supplier’s product. The rep’s task at the Point-of-Design is to convince the supplier that the products selected will work as required. An energetic rep will encourage the customer to take advantage of proprietary features of the supplier’s products 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 bill of materials.

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 a manufacturers’ representative provides support to the buyer; and 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 customer’s dissatisfaction with the supplier. In order to achieve customer satisfaction, the disparate sales reps must work harmoniously 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 must encourage all three manufacturers’ representatives to work together. A smoothly functioning split commission program is the tool that brings about cooperation between those two or three sales reps. 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, increase 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 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 not exceed 100 percent of the commissions normally paid on a single location sale. Violation of this rule challenges reps with initiative to seek an ever-increasing slice of the commission pie.

Conclusion

In today’s era of globalization, most customers have activities in multiple geographies. 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. Once people responsible for implementation make their decision, they must not stray from their decisions.