Commissions: You Get What You Pay For

Edition: May 2002 - Vol 10 Number 05
Article#: 1235
Author: Jack Evans

''This is NOT rocket science,'' is the response from manufacturers and reps alike when asked how they best work together. A fair commission incentivises reps to sell.


Yet manufacturers and independent sales reps often appear at odds over why their relationships are not working. Consider the following real-life scenarios:


1.        Manufacturer: Pays 5% commission for line. Disappointed with their rep's ''poor'' performance. Now considering hiring in-house salespeople and letting their reps go.


        Rep: Likes vendor's line but focuses on the other lines that pay 10% and generate the more income for half the work.


2.        Manufacturer: Pays 10% commission for line. Thrilled with annual double-digit growth in sales. Enjoys low rep turnover.


        Rep: Highly incentivised and rewarded to keep focusing on this core vendor that generates a profitable return on their time invested.


3.        Manufacturer: Acquires another company and inherits their respective independent reps. Reduces the existing 10% commission rate to their own corporate 7% rate. After the first quarter they find the new reps are not maintaining their quotas so threaten to replace them unless sales pick up the next quarter.


        Rep: Watches another vendor lost through acquisition. Meets with the new corporate owners to explain how the existing rate is fair compensation for their time and effort. Frustrated by no response, now spends more time selling their other remaining 10% commission lines.


4.        Manufacturer: Looking at their quarterly commission reports, they decide they are losing profits by paying independent reps too much.  They fire their reps and hire inside sales people.


        Rep: Have been working hard on this core line and were being paid well for their time. Can't believe they are being fired for doing too good of a job.


Sound all too familiar? These same scenarios appear to repeat themselves over and over again with each new combination of manufacturer and independent rep. Only the second scenario represents a mutually beneficial relationship that shares the same viewpoint on sales.  Consider the following:


Sales: Vendors need local salespeople who have the customer base and relationships necessary to successfully sell their products.
Reps: Reps need core and related product lines to offer one-stop category shopping to their customers.
Time: Reps need to be paid fairly for their time and effort spent on selling a particular product line.
Commission: Vendors need to pay fair market rates (or higher) to motivate their reps to promote and sell their products.
High Rates = High Sales


This appears to be a straightforward equation:


1.        Manufacturers reps are motivated to sell by making more money.
2.        Higher commission rates result in higher earnings per sale.
3.        Therefore reps will sell more if paid more.


''What's wrong with paying our reps 5%?'' a manufacturer recently asked me. ''All of them signed our contract, didn't they?'' I asked a few simple questions. How were their sales? Minimal.  Did they hear often from these reps? Rarely. Were these sales from new accounts or reorders from current customers? Reorders.


Vendors please note: There is a significant difference in sales between a rep carrying a line and a rep that actively promotes and sells that same line! Do you want your line to be carried or sold?


Economic Justifications?
Sales have been down.  Customers have been closing their doors or being acquired.  Foreign competition has grown stronger. Distributors are demanding higher margins and more vendor ''participation.'' So do we simply conclude that commissions must drop also?


Not necessarily. Commissions are often lowered in situations where distributors are playing a more significant role in selling-through product. But overall, price-cutting has never been the one and only answer to increased sales. In fact, price reductions have been documented to generate lower margins that ultimately cause businesses to fail.


In a slow economy, sales increase as a direct result of selling time and effort. Face-to-face meetings. Promotions. Programs. Incentives to sell-through and purchase at every point in the supply chain.


Even if a manufacturer does manage to justify lowering commissions, they cannot escape the end result: manufacturers reps sell less when they are paid less. The manufacturers lose sales and market share. The reps lose income and incentive. This is a lose-lose scenario.


How do you create and sustain a win-win scenario between manufacturer and rep? Incentivise reps to sell more by paying them higher commissions and their sales will more than pay for the increase in their commissions. The manufacturer will sell more and gain market share while the rep will focus on this core line that fairly compensates them for their time and effort.


Health Industry Representatives Association (HIRA) is a trade organization that focuses on promoting the independent manufacturers' representative function within the healthcare industry to manufacturers and customers. 


Visit HIRA at www.hira.org or call (800) 777-4472 for more information.








SPECIAL WORKSHOP FOR MANUFACTURERS
Effectively Managing Your Rep Network
Phyllis M. Jones, Vice President Sales - The Americas, Bourns, Inc.
Riverside, California
Friday, July 21, 2002
JW Marriott Lenox - Atlanta, Georgia
Cost: $350





Here's your chance to become a quality partner with your sales agency, and see what that can do to boost sales. A nationally known trainer, Ms. Jones will cover motivation and management, roles & responsibilities of both the principal and the rep. Expectations, communication, sales targets, marketing and planning will all be covered. Take this opportunity to develop new strategies that will really impact your bottom line profits!


Registration Information: Call 1-800-777-4472 or 303-756-8115