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Step 3 - Create Fair and Balanced Written Agreements

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At the conclusion of the selection process, manufacturers sign agreements with their manufacturers’ representatives. These agreements need to work for both parties; otherwise, they work for neither. These agreements govern how the relationship will work and spell out the rules of engagement.

The manual contains background and rationale information for the clauses found in a typical manufacturers’ representative agreement. You will also find sample agreements in it.

For help with agreements, MANA recommends you contact our list of Rep Savvy Attorneys.

What commission rates apply for the products or services my company supplies?

Simplified Commission Rate Ranges

Manufacturers often ask MANA: “What commissions should we pay our manufacturers’ representatives?”

Based on a survey of 402 MANA members we found these common commission ranges based on customer type.

CUSTOMER TYPE    HIGH    AVERAGE    LOW
OEM                        7%         6%           5%
Distributor               9%         7%           5%
End-User                14%         11%          7%
These commission ranges get you into the ballpark. Ultimately, the uniqueness of each individual manufacturer/representative relationship will determine a commission rate that works for both parties. Under certain unique circumstances, rates may exceed these ranges.

Definitions
Customer Type: These are the customers that the manufacturers’ representatives sell to.

OEM (Original Equipment Manufacturer): These customers buy the components they use to assemble a finished product they then sell to their customers.

Resellers (Distributors, Wholesalers, Retailers, Etc.): These customers buy the products and resell them to others. They provide values by making these products available locally.

End-User: These customers buy the products and use them themselves. For example, capital equipment.

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Commission Survey (Special Report)

“How much commission should I pay my reps?”

Those new to working with manufacturers’ rep ask this question frequently. The correct answer depends on a number of variables, such as:

  • The product or service.
  • The type of customer (OEM, Reseller or End User).
  • How much business currently exists in the territory.
  • What other services the principal requires of the rep (product training, etc.).

Ultimately, whatever commission rate the two parties agree on, it must work for both.

To provide some assistance in arriving at a fair rate, MANA surveyed its members. We asked them what rates the principals paid reps for different product classifications. We also differentiated the results by customer types.

The survey goal is not to provide a specific commission rate or set an industry standard. The intent rather is to set a reasonable range. The range provides room to compensate for the uniqueness of each relationship.

To help understand the results, we define customer types as follows:

End-User: These manufacturers’ reps sell to customers that use the product themselves. Typically, this refers to capital equipment, equipment used to manufacture or produce products.

Distributor: These manufacturers’ reps sell to customers that then stock the products and resell to others. Customers in this category are distributors, wholesalers, dealers, catalog stores and retailers.

OEM: These manufacturers’ reps sell components to product manufacturers. Typically, these include castings, forgings, plastic injection molded parts, anything a manufacturer uses when they assemble a product.

The commission rates the manufacturers pay their reps tend to stay stable over long periods of time. From the MANA profile survey, we learn that many rep-principal relationships last 20 years or more. During that time, it is doubtful the commission rates change.

We hope you find the survey helpful and it’s worth repeating, whatever rate you agree to, it must work for both of you.

Note: MANA surveyed the members in 1999, 2002 and 2005 to collect commission rate data. Participation in subsequent years dropped below an acceptable level. In analyzing data from the surveys with sufficient data, the commission rates appear to be stable over time. Given there is no other commission rate data available since 2005, please use the results accordingly.

Click here for Survey

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RELEVANT AGENCY SALES MAGAZINE ARTICLES

Concern With Split Commissions Never Ends

By Jack Foster

© Nikolai Sorokin | Dreamstime.com

The back and forth between principals and independent manufacturers’ representatives concerning the payment of commissions in cases where buying decisions have been made across several territories never seems to end. A recent conversation on the MANA LinkedIn discussion page points out that while some resolution has been made in some cases, it’s a matter that remains a constant for agents — and their principals.

When a manufacturer, who works with agents, introduced the subject, here’s how the discussion proceeded: “What is an appropriate way to address a rep that has a potential sale in another’s territory? Rep ‘A’ had a customer in a territory (Illinois) from a previous employer, now it is not his territory with his new principal. The current Illinois Rep ‘B’ has not done business with the actual customer in his territory. Are there any conditions to a situation such as that? Do you follow strict territory guidelines? Do you offer split commission, etc.”

If any proof was needed that this was a timely matter of discussion, independent agents were quick to offer their opinions.

“This has happened to me more than once. In each case I told the principal that it was unethical to cut out the territory rep from the commission. I contacted the territory rep and offered him 20 percent of the commission if he would sign a sub-rep agreement with me. The territory rep agreed in all but one case after which I felt it was not a breach of ethics to get the account for the principal. In a situation where the territory rep was calling on the customer but not making headway, I offered a 40 percent split of the commission.”

“Full commission on the first order, split commission after the customer is set up for a specified period of time. Then commissions revert to the territory rep as they assume responsibility for servicing after sale.”

“As a rep, I would expect that the current rep within the territory would receive ‘destination’ credit (20 percent, maybe 30 percent of the total commission) plus ‘order placement’ credit, if applicable (maybe 10 percent), and the other rep would receive the balance.”

Speaking directly to the manufacturer, another agent said, “You are touching a sensitive area for reps and I have seen this handled many different ways. Your specific case is clearly due to the relationship the new rep had with this customer. It does sound like you might be in the capital equipment side of the rep business and there might be more room for sharing a commission. If there is the need for follow-up, service and support of the equipment, there might be a way of utilizing your local rep and getting him as part of your company’s growth at that customer.

“There are many ways to split a commission, but your key as a principal is to keep your reps motivated to sell for you. Our motivation — as reps — comes from our successes and those commission checks. I used to push principals for a standard policy for splitting a commission; some have and some have not and choose to do split commissions based on each individual case. I am an OEM rep and commissions are not that of a capital equipment rep as we have repeat (we hope) sales compared to a single-sale transaction.”

“I have been on both sides of this issue — as vice president of sales for a contract manufacturer and now as an independent rep. You, the manufacturer, have to decide this issue. Hopefully, both of these reps work for you, and you have contracts in place with each of them with a clause in it covering split commissions. If so, follow the percentage guidelines for split commissions. From your description, it sounds like the sale may not have occurred for the new rep if the old rep had not had the relationship with the customer. That relationship is of value and the ‘specifying rep’ should get some compensation for his efforts. One thing is sure — the situation will reoccur and often in the opposite direction. Fostering good working relationships among your reps is critical to everyone’s success.”

And finally, an attorney noted, “It (split commission) is typically addressed by the manufacturer, not by the reps between themselves. Of course, there often is a split commission clause in the rep agreement between the sales rep and the manufacturer.”

Splits Happen with Frequency

Tom Leslie is no stranger to experiencing split commissions. Leslie, Thomas M. Leslie & Assoc., Arcadia, California, explains that “given the nature of the business that we’re in, instances of split commissions seem to happen more and more. It remains one of the more difficult situations I’ve faced as a rep. If we all lived in a perfect world and there was one person — a king — who made all the rules we’d live by, then that would be a great way to handle split commissions. But as any rep knows, that’s not the way things are.”

Leslie, who has more than 30 years of experience in technical sales and consultation in aerospace, defense and medical industries in California, Arizona, and Nevada, continues, “Here’s what I’ve encountered. You’ve got some principals who want to ignore the problem and treat the situation ‘old school.’ By that I mean if the order is shipped to your territory, then you get the commission. I find that approach to be completely unacceptable.

“I’ve made it a practice to discuss the possibility of split commissions with prospective principals. Personally, I’ve always felt that a fair way to deal with split commissions is that the originating rep — the rep involved in the start up and design of the project — should get the majority of the commission. When you consider the potential timeline in the process, that startup and design part can take up to three years or more. The rep has to be able to recoup all the work that was done at the beginning.”

Approaches Vary

When the possibility of split commissions presents itself to an agent, Leslie says reaction on the part of the rep can vary. “I don’t mean to be evasive here, but it really depends upon the rep. Consider, for instance, some reps who want commissions for the life of the project. Given that some aerospace projects can last upwards of 20 years, that can be unreasonable.”

He continues that in some instances, principals are the best ones to determine how a commission should be split, but “really it all comes down to a case-by-case basis. I used to say I’d like some sort of a formula to be developed that would work in these cases, but given all the variables involved, that’s not really possible.”

When all things related to split commissions are considered, Leslie says there are some constants that both principals and agents ought to keep in mind.

“Considering the principals first,” he says, “their focus has to be on keeping their reps motivated to continue the work. You always want the rep to continue generating new business and keeping the customer happy.”

What the rep must keep focused on, he continues, are a couple of things. “There’s always the potential for the principal to make an account a national account. When that happens the rep handling the R&D also handles the location the order is shipped to in your territory. Then he gets the commission. I’ve actually had that happen to me and I can’t say I necessarily liked it. In the end, I was successful in renegotiating things to my benefit.

“Then there’s the chance the principal will simply throw his hands up in the air and say ‘You (reps) work it out among yourselves.’ I’ve also had that happen and while it worked out in one case, in the other it did not. What can happen is that the principal runs the risk of upsetting both agencies involved.”

Leslie concludes by noting that split commissions remain a touchy issue. “If I had a preference, I guess it would be that the principal would work it out.”

Advice from the Past

As evidence that split commissions are a concern that never seems to go away, it’s probably worth citing information that appeared in Agency Sales close to a decade ago. At that time, the following areas were urged for consideration:

  • Written agreement — Always be sure to get as much in writing as possible beforehand. Even if the subject is only touched upon during a conversation with a principal, it would be wise to follow up — in writing — confirming the details of that conversation. In addition, having a written provision included in the contract would go a long way toward addressing the concern.
  • Negotiation — Negotiate prior to the order. It’s after the fact that things get much more difficult. Before signing a contract, it’s always wise to run your agreement with your principal by your attorney. And if split commissions are expected, it’s best to have them negotiated prior to agreeing to take on the line.
  • Communication — If the agent knows beforehand that an order is coming down that may call for split commissions, it’s imperative to communicate with the principal as soon as possible. Inform him of the extent of the work you’ve done, even though the order is formally being placed from another location. If you wait, you may find that you wind up with a smaller part of the commission — or worse yet, nothing at all.
  • Reaction — Remember that your principal isn’t going to change everything just for you. As a result, it’s important to react in a professional manner; let your principal know all the details of a given situation and urge him to work with you on it.

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OTHER RESOURCES

Product Liability Protection For Reps — By The Numbers

The probability of a manufacturers’ representative being named in a product liability lawsuit is small. The probability of a judgment being rendered against a manufacturers’ representative in a product liability lawsuit is even smaller.

In a non-scientific survey done by MANA, less than eight percent of the respondents said they had ever been named in a product liability lawsuit, and less than half of those said they had been carried all the way through the suit. The survey was sent to all MANA regular members, so it is likely that the respondents were mainly those who had some concern about the issue. It is also likely that those that did not respond, for the most part, had never been named.

However, without proper planning, just being named in a lawsuit can be painfully expensive, and receiving a judgment can be financially disastrous. Many members have reported that they spent $5,000–$6,000 on attorney fees just to get to the point in the discovery process where it became clear that they were not responsible for damages and were dismissed from the suit.

So what should you do to protect your business and yourself? MANA is obviously not in a position to give direct legal advice, but we have summarized below the recommendations we have received over time from attorneys, insurance providers, accountants, other professionals, and members who have been involved in product liability lawsuits. Take a look at these, and then make your own informed decision after consulting with your legal advisor.

1. Indemnification

  • Insist that the contract include a “hold harmless” clause (see Paragraph 9 of MANA Sales Agency/Principal Agreement Guidelines). The inclusion of this provision in the contract usually insures that your defense will be conducted by the principal’s attorney along with his own defense in case of a product liability lawsuit.

2. Co-Insurance

  • Request that your principal name you as an additional insured in a Broad Form Vendor Endorsement on his product liability insurance policy. Also request that you receive an annual copy of your principal’s insurance certificate to verify continuation of your inclusion as a co-insured. This procedure usually does not affect your principal’s insurance rate, although it could affect the amount of insurance available to them. Co-insurance is not an option if the principal self-insures for product liability. Over one-third of MANA members now have this coverage from 100 percent of their principals and another large percentage has been co-insured by some of their principals.

3. Incorporation

  • Pure Rep, Commission Sales Only — Protect your personal assets by organizing, and judiciously operating, your company as a limited liability entity, a C Corporation, an S Corporation, or a Limited Liability Company (LLC). (There may be other reasons to be a sole proprietorship or a partnership, so check with your accountant.)
  • Buy-Sell or Stocking Rep — Consider establishing a second corporate identity for that portion of your business where you are involved in handling, modifying or packaging product, or servicing product, or training in its use. The probability of your company being dismissed from a product liability lawsuit is much lower under these conditions, or if you represent a foreign supplier with no assets in the U.S., so be sure you have adequate insurance coverage on the new corporate entity as well. This may require that you purchase your own product liability insurance on the new entity.

4. Insurance

  • Purchase Product Liability Insurance — Product liability insurance may be impossible to get or prohibitively expensive, depending on the nature of your business. However, rates and availability are improving. Some members are purchasing product liability insurance for their rep firms at reasonable prices, particularly if they represent products that have low potential for injury to the user.
  • Self-Insure — Consider the probability that you will be named in a product liability lawsuit and the expected result. Then compare those numbers with the cost of carrying product liability insurance. In the worst case, if you are not indemnified by your principal, and you are not co-insured by your principal, and you have handled, modified, packaged or serviced the product or trained in its use, but you are incorporated and have judiciously operated your business as a corporation, your loss could be limited to the physical assets of your business and your attorney fees (although your exposure could be greater, depending on conditions). The physical assets of most manufacturers’ representative firms are limited to a few computers, fax machines, phones and office furniture.

5. Accurate Representation

  • No professional salesperson, rep or direct, would intentionally misrepresent a product or service. But one should be careful to never make a claim for a product that cannot be backed up by published data or written instructions from the supplier. Reps would also be well-served to be skeptical and question any performance recommendation that exceeds the supplier’s published data, proposal statements or similar information. If it seems too good to be true, question it. As mentioned above, if you function as a professional engineer, product or technical expert, technical advisor, or trainer, in addition to a commissioned rep, be sure to consider appropriate additional insurance (e.g., Errors and Omissions) and a separate corporate entity for that function.
  • In the litigious society that we operate in today, everyone in the supply chain must be aware of the potential for a product liability lawsuit. When plaintiffs are injured and file suit, their attorneys often cast a very wide net to be sure that every business involved in the transaction that may be even partially responsible is named. The straight-commission rep that solicits orders on behalf of a principal, and nothing more, may be dismissed once the discovery process proceeds to the point where it is clear the rep did not design, engineer, manufacture, handle or modify the product. But the facts may not always be clear, and the rep could be in for a long ride. Evaluating the information presented above and making an informed decision is a critical part of being a complete businessperson in today’s business climate.

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Extended Post-Termination Commission Clauses

TELEFORUMS AND PODCASTS

Teleforums are hour-long conversations with people who know the topic. Podcasts are shorter interviews with knowledgeable people.

004: Key Elements of a Rep Agreement

It’s more than making sure the T’s are crossed and the I’s are dotted. A good rep/principal agreement requires strategic thinking before the first clause is even written. In this episode attorney Daniel Beederman reviews the strategy underlying the creation of a successful rep/principal agreement.

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