Clinton Gott of Better Sales Comp wrote a great piece on best practices in focusing retail associates on improving store-level results. If you’re in Retail and looking to focus your store management and employees on what they most directly control, click through for a very practical overview.
The question: Should we be using our standard annual merit pay adjustment process with our sales team’s base salaries, or should we just expect them to earn their own raise through increased sales?
The answer will depend on a few characteristics of your company, your sales jobs, and your sales incentive plans, so find your situation below for some best practice pointers.
If you’re in an early stage business with less than 50 sales people, or if most of your sales people have at least half of their annual compensation coming from their commission or variable pay…
In this case, it is most common to find that base pay is adjusted rarely, if ever. Adjustments are usually triggered by significant increases in responsibility (quota size, team lead, etc.), and are not done on an annual cycle. Over the long run this may lead to a very incentive-rich pay mix as the most tenured sales people build a book of business which rewards them more and more while their base pay stays the same, potentially over many years.
This may eventually require adjustment via increased base pay and a change in the core incentive structure as the business matures and the focus of the relationship with the customers shifts from being primarily with “their” sales person to being a larger overall relationship with your company. But in many businesses, this arrangement can persist for years and is a sensible approach.
If your business is more mature, your sales force is larger, or if your sales people have a more base-rich pay mix (60% or more of total compensation at target in the base)…
This indicates that your sales people are probably part of a larger selling team and/or your brand and customer relationships are strong enough that the customer would see their relationship and decision to buy as more influenced by the company than by the specific sales person. This doesn’t mean that the sales person is unimportant, just that they are executing their part of an overall customer life cycle that is primarily orchestrated by the company.
In this case, it’s important to maintain the pay mix. So expecting the sales person to “make their own raise” would eventually result in a pay mix that is too incentive-rich, and run-away compensation amounts for the most productive sales people. So, to keep the pay mix in balance, the base and variable sides must be managed. Some businesses manage the base through the regular annual merit cycle so that each person’s base is adjusted based on standard company criteria. At the same time, the variable opportunity at target is generally increased in alignment with the annual merit guideline.
In other businesses, the base pay and total compensation for sales are managed, but not necessarily on a strict annual cycle. Adjustments every two or three years can also work well to manage position against market as well as pay mix. And, of course, there will be a need to do some between-cycle adjustments for specific situations as they arise. However, it should be noted that there’s usually more required in these businesses than just making the sales numbers, and the annual performance management, assessment, and merit adjustments provide a good opportunity to reward for all the things that matter and that may not be directly reflected in sales results each year (skills, experience, leadership, long-term potential).
Sometimes our sales people lose business due to factors outside their control (e.g., customer bankruptcy, mergers, incompatibility of our offering with their requirements). Do we reduce quotas when this happens?
Why do you have a sales incentive plan?
The first thing to keep in mind is that the sales compensation plan, and the quotas, are in place to do something very important:
Provide motivation and focus for sales people so that they deliver more and better results than they would have without a sales incentive.
Of course this needs to happen at the right cost of compensation for the business, and with fairness among sales people in mind, and in a way that helps attract and retain key talent, and without encumbering the company with excessive risk or administrative burden, and. . . But it’s good at these moments to go back and remember the main objective of our efforts with sales compensation, as this will help us find the right answer in tricky situations.
How much “lost” quota before an adjustment
So, with the goal in mind, it’s usually best to adjust the quota if it appears that failing to do so would undermine the motivational value of the plan. Usually this happens when a meaningful chunk of the sales person’s quota is “lost” due to forces beyond their control.
How much is “meaningful” depends on the degree of accuracy in the quotas.
- If the role is primarily new account development, then you’d expect substantial variability in quota attainments (say, 80% of people end the year between 50% & 150% of quota). In this case, you might adjust the quota if as much as 30% is “lost.”
- However, if the role is primarily account management and quotas are therefore more accurate (say, 80% of people end the year between 80% & 120% of quota), you might have a threshold in the plan of 75% of quota, and so might need to adjust the quota for “lost” business of only 10% of quota.
How much to adjust
The lost business should free up some sales capacity, allowing the sales person to pursue other opportunities. So clearly 100% of the lost business would be too much to adjust out of the quota. Something between 30% and 70% of the lost amount would probably be reasonable as an adjustment, depending on the length of the sales cycle and the degree of penetration of the assigned accounts/territory.
Managing the adjustment process
Businesses that make a regular habit of adjustments will find they receive more and more requests for adjustments unless they have an adjustments policy and process.
An adjustment policy should cover:
- What the criteria are for considering an adjustment (e.g., at least 25% of the annual quota is no longer attainable due to circumstances outside the control of the sales person)
- What the process is for requesting an adjustment (e.g., submit a request to your manager, who will then need to approve it and forward it on to the sales compensation committee for review at the quarterly meeting)
- Likely adjustment outcomes (e.g., the sales compensation committee may approve a quota adjustment of up to 50% of the lost business if they feel it is warranted).
What do other companies do?
WorldatWork, along with Better Sales Comp, completed a Quota Practices Survey in 2012. Click through to find answers to questions about prevalent practices.