by John Simari
The topic of representative commissions is important and multi-faceted. It is important because it is how a rep gets paid by the manufacturer for all the work that the rep does on behalf of the manufacturer. In general, reps earn a percentage of the manufacturer’s revenue for the business that the rep owns and drives. Sounds simple.
It is also multi-faceted because there are many considerations that must be addressed when establishing an appropriate rep commission model.
Among those considerations are:
• Alignment on what business is included in the commission calculation.
– Direct and Distribution business.
– Offshore business.
– Business supported through EMS providers.
– Business supported through high-service/catalog distributors.
• Split commissions when more than one rep might be involved in business across different locations.
There are numerous ERA member resources to help navigate those decisions.
Manufacturer’s revenue
The topic of this article is narrowly focused on the commission calculation itself – specifically, the definition of “manufacturer’s revenue.”
There are fundamentally two ways to define the manufacturer’s revenue. Both definitions are used in the industry to calculate rep commission. We will look at the pros and cons of each approach.
Every rep commission includes the manufacturer’s revenue as a key component. There are fundamentally two ways to measure that revenue — point-of-acquisition (POA) revenue or point-of-sale (POS) revenue. Each measures a different point along with a sales channel transaction. Selecting the appropriate one can impact how effectively reps, distributors and manufacturers collaborate in support of an end customer.
Defining terms
When business is transacted through distribution, there are effectively two sales transactions — point-of-acquisition (POA) and point-of-sales (POS).
POA transaction. The first transaction is between the manufacturer and the distributor. The manufacturer sells its product to the distributor and realizes revenue for that transaction. It may be simple where the distributor uses “book cost” and marks it up for the customer price, or it may involve a customer-specific ship-and-debit cost. Either way, there is an agreed-to cost for this transaction between the manufacturer and the distributor. Measurement of manufacturer revenue for this transaction is called point-of-acquisition (POA) or point-of-purchase (POP).
POS transaction. The second transaction is between the distributor and the end customer. The distributor uniquely owns what to charge the end customer but often relies on the manufacturer and rep for market or customer intelligence. Strictly speaking, revenue from this transaction is a measure of distributor revenue. However, it is also a measure of the sale of a manufacturer’s product into the marketplace. The measurement of revenue for this transaction is called point-of-sale (POS).
Transaction example
In this specific end-customer transaction, the manufacturer has agreed to support an $0.80 cost to the distributor. The distributor has marked up that cost to $1.00 for sale to the customer, a 20 percent margin. Here the POA revenue is $0.80 and the POS revenue is $1.00.
Some manufacturers calculate rep commissions using POA data, while others use POS. Which one is most appropriate? Let’s explore the differences along two vectors: bookkeeping/accounting view and a sales motivation view
Bookkeeping/accounting view
One of the key advantages of the POA approach is that all the data to make commission calculations are within the manufacturer’s financial systems. Manufacturers know the price that the distributor is paying for each transaction. And, POA revenue reflects the actual value that the manufacturer realizes from each transaction.
Because the POS method measures revenue at the second sales transaction, a manufacturer needs to rely on distributor-provided, customer-specific POS data to calculate rep commissions.
Some manufacturers may believe that they do not get timely, accurate POS information to use POS for rep commissions, especially when the calculation may include distributor POS data from other regions or via an EMS provider.
Also, POS data includes the distributor margin that the distributor keeps. So, some manufacturers conclude that they are paying a commission on money that they never see. At times, distributor margins are very high to cover the cost of value-added distributor services, which inflates the end-customer pricing with no benefit to the manufacturer.
Accounting rules can dictate how a manufacturer must report its revenue to shareholders and regulators. This is not a factor in this rep commission discussion.
The availability of good, accurate, timely and easily accessible data can influence a manufacturer to choose POA over POS to calculate rep commissions.
Sales motivation view
As with any sales compensation model, rep commissions are intended to focus and motivate the sales team. In this case, it is not just the reps that need to have focus and motivation, it is all members of the customer-support process — the sales teams from reps, distributors and manufacturers.
A POS model ensures that all three partners are aware and focused on what the end customer pays. That is what establishes the value of the manufacturer’s product in the marketplace. All should be motivated to ensure that the end-customer price stays appropriately high. Any time a direct salesperson or a rep is compensated solely on POA, they can be ambivalent to the end-customer price. It is true that ultimately the distributor owns that end-customer pricing decision by law, but that does not mean that the three partners should be striving for the same thing. Having this joint focus drives collaborative discussions between the partners and keeps a common face in front of the customer.
Also, the product and application expertise that reps and manufacturers can offer the distributor during the end-customer pricing process can be invaluable. This input could be lost if the rep and manufacturer incentive ends at POA.
Some manufacturers may believe, and some reps may fear, that a POA-based model is a “save money” approach as POA is always less that POS. However, any good sales compensation model should be designed to provide good compensation for good performance and great compensation for great performance. That can be accomplished using either approach with forethought and modeling.
Conclusion
POA and POS are revenue measurements of two distinct sales transactions. Either can be selected for use in rep commission calculations. From a purely bookkeeping and accounting perspective, POA has advantages. However, because a rep commission is a sales compensation model, the advantages of using POS make it a better choice.
John Simari
Special Consultant to ERA
John Simari held a range of sales and marketing positions at Texas Instruments (TI) prior to his retirement in 2016 after a 37-year career. For most of that time, Simari was a key contributor to TI’s worldwide distribution program.
He has held positions as worldwide distribution director, Americas distribution director and worldwide account manager for distributor and OEM accounts.
Simari has been an active contributor to industry activities serving for eight years on the Electronic Components Industry Association (ECIA) Board of Directors and Foundation Board. He also is a business leadership center instructor at the SMU Cox School of Business in Dallas.
Simari can be reached at simariconsultingllc@gmail.com.
