Understanding the Dynamics of Split Commissions in Global Sales

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 salesperson 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.

Key Points in the Sales Process

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. 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.

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-procurement is the location where the manufacturers’ representative provides support to the buyer, where purchase orders are written and where purchase contracts are negotiated.

Point-of-Manufacture

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.

Commission Tracking and Dispute Resolution

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.

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.

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% of the normal commission that would be paid on a single location sale.

Conclusion

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 waver once decisions are made.