Best Practices: Manufacturers’ Rep Compensation
Suggested Manufacturers’ Guidelines to Drive Behavior and Enhance Mind Share
by Cesare Giammarco, Consultant
Manufacturers who use the rep model, or are considering it, often ask: What is the most appropriate commission rate to pay manufacturers’ reps; is there a standard percentage? The short answer is there is no “standard rate.” It varies by company and industry. Commission rates should not be some arbitrary percentage. The scope of the manufacturers’ rep’s compensation goes beyond just a commission percentage. Although from an accounting perspective a commission may be calculated as an expense, it really should be looked at more as an investment. The best practice approaches noted in this article are reflective of that. They are meant to provide both manufacturers and reps a guideline to enable each to have a balanced return on the mutual investment they contribute to the sales growth of the products represented.
The foundation of the best rep compensation plan
Incentives drive behavior, and if properly guided, that behavior will generate the expected results. As a manufacturer your long-term business strategy should directly align with the basis of your rep compensation plan.
Do all the elements of the compensation plan reflect your market segment, distribution and global growth goals?
All compensation plans need to be easy to track for payment timing and accuracy.
If your business has a global scope, does the comp plan appropriately compensate for the design efforts?
Upside incentives designed to drive specific initiatives – are they realistic and easy to measure?
The scope of the manufacturers’ rep’s compensation goes beyond just a commission percentage. Although from an accounting perspective a commission may be calculated as an expense, it really should be looked at more as an investment.
Establishing a commission rate
As previously mentioned, the commission rate for a rep should not be an arbitrary percentage or some perceived industry standard. Commission rates should be reflective of the selling cycle. The question to ask is: How much time and resources will need to be invested in the sales effort before the manufacturer sees any revenue and the rep sees any commission?
If the product is considered a commodity, the commission rate would be reflective of that. If the business is one where the effort to develop and support a program is an extended one, this should be considered when a commission percentage is established.
If the product strategy is one of value-added or uniquely differentiated products, the sales cycle and rep resources required to support this focus should also be considered.
Determining commission splits
When deciding on appropriate commission splits between reps, the operative word is influence. Where are and who are the key decision-makers? Another territory may be involved if the product ultimately ships to a different location other than where the design and purchasing reside.
Manufacturers determine which location has the most influence and compensates that rep with a greater portion of the commission. Typically, the best practice for the percentage of commission to the design location is a range of 70-90 percent and purchasing 30-10 percent, again, dependent on where the key influencers are located. If the shipping location is not centralized at either the design or purchasing site and there is some level of support needed there, a portion of the commission is allocated accordingly. Three-way splits should be the exception as they can be difficult to manage and dilute the compensation to the rep(s) located where there is a significant influence.
Compensation for international business
Manufacturers who have a global customer base recognize it is important to compensate their reps to work with the design and procurement teams of those companies who are making the decisions domestically. The key elements to a compensation plan that rewards manufacturers’ reps for continuing to pursue and develop global business would entail the following:
A robust process in place is to track and identify shipments designed in the U.S. but ship outside the U.S. in order to correctly assign commission. Some reps have shared that certain manufacturers continue to struggle to get this accomplished. It is understood that with standard part numbers on multiple programs, this might be a challenge; however, identification and tracking is critical to compensate the reps who do the design work with global accounts.
Once again, compensation should be tied to influence. A best practice is to assign a range from 80-100 percent of the commission to the U.S. rep who worked the design or negotiated the procurement contract. Many manufacturers have a direct salesforce or stocking distributors supporting the shipping location outside the U.S., so no commission will flow that way. Compensate the rep who worked the design and closed the deal in the U.S. and maintain the commission for the life of the program.
Make the domestic rep part of the account team that supports a global customer. The local rep has insight into the customer that could prove very valuable to the salesperson calling on the international location.
I have experienced situations where, internationally, with multiple contract manufacturers bidding a program, each tried to negotiate lower prices to gain an edge in securing the business. Having the rep on the account team armed the global salesperson with information on agreed-upon pricing, technical considerations and competitive insight, allowing for maintaining a strong value position.
Manufacturers who have great success in ensuring a U.S.-based global business is properly pursued, developed and tracked, align rep and regional sales managers (RSM) goals. In some cases, although global design influence is in a regional manager’s assigned territory, that revenue is not in the RSM’s plan. Aligning the goals between the rep and RSM to include the international revenue gives both parties a vested interest in the success and tracking of the program.
Legacy business compensation
A few manufacturers opt to pay a modified or reduced commission on legacy business over some defined period. Every manufacturer wants its reps to pursue new business, and the same objective is shared by the reps. However, it is also important not to underestimate the time and effort required to support ongoing business. Reps are actively engaged with their customers to monitor program evolution and timing and to protect the business against competitive threats. All these factors need to be considered when and if modifying the commission on legacy business is discussed.
If a manufacturer does institute this type of program, it is important to consider the timing of the program. In cases where the time from development to closure is lengthy and the revenue timing is such that more revenue will be in the later stages of the program, commission adjustments should be appropriate with the revenue stream. Don’t penalize the rep for a slow startup.
These types of plans work better when focused on specific customers, products, programs or obsolescence initiatives, allowing the rep to better track and manage the associated commission.
Commission on distribution sales
When commissioning reps for distribution sales, the best practice is to consider broadline and high-service distributors equally. Both serve their customers differently but the value the rep provides with active engagement with each is equally important to drive demand creation. The type of work reps do with the broadline distributors is well documented and is always commissionable. The lead follow-up and qualification work that reps conduct with the high-service POS often become valuable volume customers for the manufacturer. It also leads the reps to design entities that are contracted by major OEMs on major programs. Commissioning reps for the high-service business has a significant payback.
The percentage commission a manufacturer pays their reps on distribution sales and direct sales should be guided by the manufacturer’s strategy. Keeping the commission percentages equal is a common practice, but if the objective is to drive most of the business or a certain volume level of business to distribution, then the distribution commission should be higher than direct business. Reverse the strategy and the commission rate accommodate the change. The important point is to not have your commission rates create “competing” channels. Emphasizing distribution as a strategy and compensating the reps at a higher rate for OEM sales could send the wrong signal to your channel partners.
Some manufacturers pay their rep commission on distributor cost and not resale. Although, for the manufacturer it might be easier to manage and calculate commission based on distributor cost, paying on POS has significant benefits for the manufacturer and distributor.
Reps typically have a more detailed perspective on the manufacturer’s products, market position and competition. This information is invaluable to the distributor sales team when pricing opportunities and enables the distributor to optimize its price position with the customer. Paying the rep’s commission on the POS reinforces this pricing support behavior.
For a distributor, the manufacturers whose reps are paid on POS and assist in optimizing pricing, invariably get more mind share.
As a manufacturer, having the reps in a position to ensure distributor resale aligns with the real value of their products in the marketplace creates a good foundation for their distributor pricing decisions.
New product and special initiatives
When a manufacturers’ strategy is to introduce and gain acceptance of a new product or technology, offering a special incentive to their reps can be important to its success.
In many cases, manufacturers have offered 2X the standard commission. Although this is an exciting opportunity for any rep, the best practice dictates that certain considerations should be considered as part of the program.
Often, NPIs, unless a true breakout technology, have lengthy product acceptance and qualification and then a slower startup. The compensation plan needs to incorporate this timing for the rep to achieve the expected higher commission. Alternatively, a commission could be paid on orders versus shipments or perhaps a partial payout on order and the balance on shipments. Engage your reps or rep council for input in developing these initiatives.
Manufacturers also introduce other special incentive programs tied to specific initiatives. Programs that are focused on new business opportunity creation and/or wins, or specific product or market wins are very common. Any and all of these can be very successful in driving growth. Manufacturers who had success with these initiatives suggest that the program is easy to monitor and track, so the reps know their progress. Make the payout timely and ensure the maximum commission or payout aligns with the revenue timing.
Have some fun with the program, make it a competition. Publish the standings regularly to all the participants and create a race to the finish line.
Best practice contractual commission support
The process of how and when the rep commission is paid and the ability to assure accurate and timely payments helps reinforce the strength of the relationship.
Commission payments should be monthly, a best practice is to utilize direct deposit.
Allow the reps six months-plus to identify and advise of commission errors. Manufacturers strive to ensure a commission is paid accurately and to the correct rep, but mistakes occur. Typically, manufacturers are not aware of the error until it is discovered by the rep. With commission payments often coming in 90 days, the rep should be given ample time to flag any errors.
When commission errors are confirmed, correct and make plans to readjust the payout quickly. Depending on the value of the mistake, negotiate a payout timing and deduction between the reps involved.
If a rep-developed account becomes a direct or house account, have an extended commission payout plan in deference to the time the account was supported by the rep.
Lastly, to provide the rep confidence in the long-term development of business on behalf of the manufacturer, consider that a termination payout clause is included in the contract with the rep organization. An example would be one month for each year of service, but other options can be negotiated between the manufacturer and the rep organization.
Alternative compensation plans
If a rep is considering a “missionary line” with no existing territory business, an option for compensation could be a monthly stipend. Traditionally some predetermined amount would be considered adequate to compensate the rep for development work and opportunity creation. During our “Best Practice Rep Compensation” breakout sessions at the 2020 ERA Conference in Austin, Texas, this was a popular topic in both sessions.
It was suggested that if a stipend was to be proposed, it should be a calculated amount that reflected the actual time and resources required by the rep to support this business. It was also proposed the dated reference to stipend should be referenced as “shared account development costs.” Further ERA review of this topic will be to establish a framework for this calculation.
Missionary lines can be small companies with high-end technology. These companies often end up being acquired. A consideration along with a stipend is to provide the reps stock options as part of any termination agreement.
If a manufacturer is requesting a specific skill or expertise to be added to a rep firm, a consideration is shared compensation for that unique specialist.
In summary, the manufacturers with the best practice compensation plans have two characteristics in common. First, as stated earlier, they view commission not as a cost but as an investment. Second, they recognize that the return on that investment flows both ways — to the manufacturer in the form of sales growth and to the reps in the form of commission payments that align with their efforts and commitment of resources in support of the line.
Cesare Giammarco
Consultant
Cesare Giammarco has been in the field of sales and sales management since 1971, with 35 of those years in the electronic component industry. In those 35 years, he has instituted, managed and integrated manufacturers’ reps globally into multiple organizations.
Starting in 1984 with Elmwood Sensors, a privately-owned global manufacturer of temperature sensing products, he led successful integration of the rep sales model through four acquisitions of this business, culminating with Honeywell Sensing and Controls in 2002. He retired from Honeywell in 2015 as North American sales director. Since then he has worked as an independent consultant for global manufacturers assisting in instituting and supporting manufacturers’ reps as their primary sales channel. He is also a special consultant to ERA on best practices to further facilitate the rep sales model.
Giammarco can be reached at cesaregiammarco@gmail.com.