Cross-Territory Sales Bring Split Commissions: Splitting Commissions Across Multiple Territories
Throughout history, 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 facility under a single roof. With the advent of Contract Equipment Manufacturers, international trade agreements and globalization, the various points of contact have been scattered to remote locations. Those remote sites might be in different cities, states, or countries. In most cases, an individual salesman or manufacturers’ representative cannot be expected to service all remote sites involved with a sale. There might be three or more manufacturers’ representatives involved. In order to align all of the disparate reps toward the common goal of closing sales for a single supplier at a single customer, a commission program must be organized that motivates all reps simultaneously. Split commissions are the technique that accomplishes that objective.
There may be up to three sites involved in the sale of components from a supplier to a customer.
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. The rep’s task at the Point-of-Design is to convince the Supplier 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, creating a defensible design win. Simultaneously, the rep works hard to disallow competing suppliers’ products from being included on the product specification.
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-Procurement is the location where the manufacturers’ representative provides support to the buyer, where purchase orders are written, and where purchase contracts are negotiated.
In today's world of globalization, manufacturing is likely to be 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 suppliers’ components are received, and those components are integrated into the customer’s manufactured product. A manufacturers’ representative at this location is needed 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, clearly something to be avoided. In order to achieve customer satisfaction, the disparate manufacturers’ representatives must work as an integrated team in concert with the supplier.
Not all customer sites provide feedback to the supplier with equal ease. Quite often, a problem at one site is communicated to the rep at another site. Manufacturers’ representatives must frequently communicate among 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.
How does a supplier ensure customer satisfaction at all three sites? All three manufacturers’ representatives must be encouraged to work together. A smoothly functioning split commission program is the tool that brings about cooperation between those three manufacturers’ representatives. The total commissions may be split one-third for Point-of-Design; one-third for Point-of-Purchase; and one-third for Point-of Manufacture. Depending upon the amount of work performed at each site, the split could be adjusted in order to favor the site where the heavy lifting occurs. Design sites frequently earn half or more of the total commissions paid.
Commission splitting programs are not free. In order to implement
then, two functions must be in place: First, sales management must
have the authority to determine which customers will be involved with
commission splits. Minor customers may legitimately be excluded from
a split commission program because the cost of implementation exceeds
its cost. Sales management must determine the ratio of the split among
the three manufacturers’ representatives and have the clout to implement
the ratios with the reps. Second, the sales organization and the finance
or accounting department must track all of the sales to customers involved
with commission splits, provide sales data to all applicable reps and
pay the reps accordingly.
Preparing for the Inevitable: Commission Disputes
The best-written and best-implemented split commission program will ultimately become the target of a dispute. One or more of the manufacturers’ representatives involved ultimately feels as though it is not being fairly compensated. 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 total no more than 100 percent of the normal commission that would be paid on a single location sale. Violation of this rule only challenges reps with initiative and resourcefulness to constantly seek an ever-increasing slice of the commission pie.
In today’s era of globalization, most all customers have spheres of influence in multiple geographies. All 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. The people responsible for implementation cannot waiver once decisions are made.
This article first appeared in the March 2006 issue of Agency Sales magazine. Glen Balzer is a management and forensic consultant involved with marketing and sales. He advises parties involved with relationships and contracts between manufacturers’ representatives, suppliers, customers and industrial distributors. He has integrated divisions of companies upon merger and acquisition. He has been involved in establishing and managing marketing and sales organizations throughout America, Europe and Asia.
Contact him through his Web site: www.neweraconsulting.com