Value Added and Sales Commissions

Recently a fellow PIW member asked the following question: "We currently use a Value Added formula for paying sales commissions. . . This works well for the products we produce. However, for the times when we do not have the time or capacity to produce a particular job, I am wondering how (to pay)commissions. . ."

Since this is a commonly asked question, I thought it prudent to include my response in this blog. Here it is:

"The answer is centered around why we choose to use value added in the first place. The reason it 'works well for the products we produce' is because that is what value added leads us to. If we produce more of our products in house, we grow, add more value, create more jobs, & generate more profit.

However, there's an excellent reason for outsourcing products: the customer, whom we must satisfy, wants them. So we often make a TEAM decision to buy them out of house. When we do that, we do not create more jobs, the profits and value added are less, and we might even be helping to create a future competitor. Clearly, there are pros & cons, but we sometimes choose to do it. When we do so, everyone should contribute to the effort. The company makes less money, sales gets paid less commission, production should figure out how to raise capacity and/or learn how to produce it, and management needs to educate & support these efforts.

Educating the associates on this premise and then generating a genuine TEAM attitude will then help everyone, which includes the customer, to win something."

Please add your own insights.