Most reps concentrate on selling their products and give little thought to whether their principals pay commission based on Point of Purchase (P.O.P.) or Point of Sale (P.O.S.). The important thing is that a commission check arrives every month - but did you know that if one of your principals converts from P.O.P. to P.O.S. it could cost you a full month's commission during the transition month?

In this article, Prime Devices Corporation President Charles Cohon explains P.O.P. and P.O.S. commissions and how P.O.S. to P.O.S. conversions work. Clip this article and save it - it could be worth a month's commission someday!

By Charles M. Cohon, CPMR, President, Prime Devices Corporation

Big distributors with central warehouses are a special challenge for manufacturers who want to provide fair compensation to their representatives. Consider the example of parts that are brought into a distributor's St. Louis central warehouse to be broken down into small lots and sold nationwide.

The Cincinnati rep for that manufacturer has worked diligently to convince a Cincinnati customer to use the manufacturer's products. That Cincinnati customer buys the product from the Cincinnati branch of the national distributor, with stock drawn from the St. Louis warehouse.

In a Point of Purchase (P.O.P.) commission system, the manufacturer paid commission to the St. Louis rep when parts were sold to the national distributor's St. Louis central warehouse. Because the Cincinnati rep earned no commission on parts sold by the Cincinnati branch of that distributor, he/she learned to direct customers away from that distributor, or just stopped promoting that manufacturer's product.

Clearly, a system that drives a rep to shun a particular distributor or to stop promoting a manufacturer's product is a problem. The commission system developed to correct that problem is called Point of Sale (P.O.S.) commission. P.O.S. requires that distributors provide to a manufacturer a branch by branch list of all sales of that manufacturer's product each month. The manufacturer pays commission based on the sales reported by each branch of the distributor rather than sales to the central warehouse.

In this example, the Cincinnati branch of the St. Louis distributor reports that sales were made to a Cincinnati customer, and the Cincinnati rep is paid for those reported sales. The St. Louis rep also is paid based on the sales reported by branches in his/her territory rather than receiving commission for orders placed by the central warehouse. There no longer is a reason for the Cincinnati rep to shun the national distributor's Cincinnati branch, or to reduce his/her promotion of the manufacturer's product. This system is almost universal in the electronics industry, but other industries are just starting to use P.O.S. commission systems.

An established P.O.S. commission system is a boon to representatives who have branches of national distributors in their territories. The hidden pitfall becomes apparent when a P.O.P. commission manufacturer converts to P.O.S.

For our illustration we will use the simplest possible scenario: one central warehouse serving a single distributor branch location, with both the warehouse and the branch in the same representative's territory. The manufacturer currently is paying commission based on P.O.P. The agent represents the line from January 1, 2002 to December 31, 2002. (I'm not encouraging anyone to get into and out of a rep agreement in a single year - it just simplifies our example!) Every month the same events repeat.

The central warehouse buys $10,000 worth of product from the manufacturer and transships that material as needed to the branch location.
The branch location sells $10,000 worth of the manufacturer's product.
Every month that the central warehouse buys $10,000 worth of product, the representative earns a $1,000 commission, payable on the 15th of the following month.

This very simple example makes the concepts easier to explain, but the same principles apply whether the central warehouse serves one distributor branch location or 1,000 branches, and whether the manufacturer sells exclusively through distribution or a mixes distribution sales and direct customers.

To see the source of the problem, let's take a side-by-side look at what the rep commissions would be if the manufacturer had paid commission based on P.O.P. for the entire year or based on P.O.S. for the entire year (Chart One). P.O.S. and P.O.P. commission columns show the month the distributor bought the products and month the distributor resold the products. In the P.O.P. column, the month of purchase is bold to indicate that commission is based on the purchase month. In the P.O.S. column, the month of resale is bold to indicate that commission is based on the resale month.

Under the P.O.P. system, the rep receives commission for material the distributor purchased from January to December 2002. Under the P.O.S. system, the rep receives commission for the material the distributor resold from January to December 2002. Under either system, the rep provides 12 months of service and receives 12 monthly $1,000 commission checks.

In many cases, the sales manager preparing to convert from P.O.P. to P.O.S. sees a problem with the transition. Let's assume that the manufacturer in our example converts from P.O.P. to P.O.S. in July. "Wait a minute," thinks the sales manager. On June 15 I paid P.O.P. commissions on parts I sold to the distributor's central warehouse in May. "The P.O.S. reports for July cover material that was sold by the distributor in June, which means the distributor purchased it in May. I can't pay commissions twice on the parts the distributor purchased in May. I need to skip a month of commissions to let the P.O.S. catch up with P.O.P." The troublesome transition month is highlighted in Chart Two.

The purpose of this article is to give reps whose manufacturers eventually may switch from P.O.P. to P.O.S. a well-reasoned explanation why this sales manager should NOT skip a month of commission to "catch up".

First, consider the most obvious argument. Chart Three shows the P.O.P. commissions paid before the transition and P.O.S. commissions paid after transition. The commissions total $11,000, so somehow the rep has received just 11 months' pay for 12 months' work. If the manufacturer had restructured its compensation to the sales manager and it involved skipping a month's pay, the sales manager intuitively would know that there was a flaw in the logic of the new system. It should be just as obvious that a system that skips paying the reps for a month is equally faulty.

Another strong consideration comes from the effect that skipping a month's commission will have on the relationship between the national distributor and the reps. The main reason the sales manager implemented P.O.S. commission was to build the rapport between his/her rep force and the national distributor. A system that starts by eliminating a month's commission for the reps will do nothing to build the sort of bonds the sales manager had hoped to foster.

Demonstrating the flaw in skipping a month's commission to "catch up" requires looking at commissions over the life of the rep agreement rather than just during the transition month. Looking back at Chart One with that in mind, we see that if the first commission check had been paid on a P.O.S. basis, the rep would have received commission for material that was purchased in December 2001 and resold in January 2002. Because the first commission check was paid based on P.O.P., it covered material that was purchased in January 2002 and resold in February 2002.

The sales manager is correct that he/she is paying commission twice for material that was purchased in May 2002, but missed the fact that, had the commissions been based on P.O.S. from the start, the manufacturer would have owed the rep commission for material that was resold in January 2002. To illustrate this point, Chart Four matches up the P.O.P. payments that already had been received by the rep with the P.O.S. payments that would have been made if the commission system had been P.O.S. from the start.

Strictly speaking, at the transition month the rep should not be paid a second time for May 2002 purchases, but rather should receive commission for the material resold in January 2002 (December 2001 purchases) as if the commission system had been P.O.S. from the start. As one would expect, the rep works for 12 months and receives 12 monthly payments.

Of course, records of material resold in January 2002 may be tough to track down. The simplest solution is for the manufacturer to ignore the "duplicate payment" on May 2002 purchases because the missing commission for material resold in January 2002 offsets it. Any more complicated system only would serve to distract the reps from their most important job, selling the principal's products.

For additional information on P.O.P. vs. P.O.S. systems, visit www.primedevices.com and read Charles Cohon's January 2000 Electrical Wholesaling article, "The Positives of P.O.S. Data".