How do sales reps get paid?
Manufacturers’ representatives, and all independent sales reps, get paid a commission for the sales they make in their area. The commission is based on the commission rate in their written Sales Representative Agreement with the manufacturer. Reps are paid only after the sale is made.
Since the manufacturer rep maintains an independent sales and marketing business, that business assumes responsibility for their operating expenses including employee benefits, taxes, advertising, auto, travel, technology, insurance costs, office equipment, etc. They are paid as 1099 independent contractors.
A true evaluation of the alternative, a factory-direct-salaried salesperson, is that what may appear as an $80,000-a-year total cost can actually be closer to $160,000-185,000. This increase is due to accounting for overhead expenses like commission, employee benefits, auto, travel and expenses, holidays, and administrative support. Manufacturers’ representatives eliminate the “soft costs” of personnel (i.e. phone service) and minimize a manufacturer’s legal exposure.
Representatives or manufacturer representative agencies pay the costs to select, train, compensate, discipline and terminate their own employees, further reducing the legal exposure of manufacturers. Each outside sales professional is backed up by an inside support person.
How much of the commission dollar do sales agencies actually keep?
Approximately 60 percent of every commission dollar a rep firm receives is paid out in direct salaries and compensation. The employment of personnel is the manufacturers’ representative’s primary overhead investment. Overhead in today’s rep firm also includes all the extra administrative services now being performed for manufacturers. These include expenses for communications equipment, travel and participation in sales meetings, trade shows and conventions. Unlike a distribution or manufacturing firm that can reduce or eliminate the purchase of supplies, materials and other items that compose the cost of sales, the manufacturers’ representative’s major cost cannot be curtailed so readily. People can’t be fired every time a dip in sales occurs.
Is it true that independent manufacturer reps make too much money?
Some independent manufacturer representatives earn more than others – sometimes, in fact, more than the sales managers who hire them. As self-employed business people, they assume the risks being an entrepreneur, and the profit motive can create high payouts. However, since the payout is tied directly to sales, higher payouts only increase their ROI on outsourcing their sales. Manufacturers reps cannot be successful without making the manufacturing company successful in the process.