Tag Archives: Base pay

Why is it important to set Target Total Compensation for a role?

Target Total Compensation (TTC) is the amount of pay that a role (not a person) is expected to earn at 100% of expected performance.  This number is absolutely essential to developing sound compensation plans.  Without it you will not know who is doing better than expected and who is doing worse.  Compared to what?  You also will not know if your plan is working as you intend it to…is it paying more or less than it should?  Compared to what?  Using Target Total Compensation provides an internal benchmark that you can use in comparison to market data, such as that provided by the TIA salary survey.  You can certainly compare what your population has actually made to the market data, but how do you know if the historical data you are looking at represents an extremely good year where everyone was above target, or an extremely bad year?  As a consultant, it’s especially challenging to compare old-plan payouts to new-plan payouts when there is no defined TTC for the role.  The new plan might pay out at target significantly less than the old plan actually did for a given incumbent, but there is no way to know if the old plan paid out more because of above goal performance or because management simply made a mistake or created a “special deal.”  This can perpetuate overpayment, as the new plan may be engineered to provide nearly the same, inflated level of pay, at simply average performance in the new year.

Looking Ahead: Should We Make a Change?

From July 2010 Sales Compensation Focus, a Publication of World at Work.

By Beth Carroll and Donya Rose

The economy appears to have taken a positive turn and many companies are starting to think about growth:  hiring more sales reps, launching a new product, or breaking into a new market segment.  One of the first questions that is raised when a company returns to growth mode, especially if there has been significant retrenching, is, “What should we do with our sales compensation plans?” Odds are high that the right focus for the recession is not going to be the best focus for the company’s growth phase. It may be time to take a hard look at your sales incentive plans.  There are some key indicators you can check to determine if it’s time to make a change, and if it is, if you can afford to wait until January 1 (or the start of your next fiscal year) to implement the new plans.

    1. You scaled back (or perhaps eliminated) incentive compensation during the recession, and now you see that your people are not engaged fully to capitalize on sales opportunities.You need to act as quickly as possible to regain momentum and re-energize your sales staff. While this is not a situation that should be left in place until the start of the next fiscal year, a full redesign of the plans may not be the only alternative. First, consider SPIFFs, contests and recognition programs. Are there things that can be done that will quickly drive new sales and create increased enthusiasm in a cost-effective manner? Second, consider adding a small “bounty” type incentive that provides additional income tied directly to the performance you need most right now (e.g., new customer acquisition), but that limits your exposure if sales opportunity radically exceeds or falls short of your expectations. Third, if you can, consider a stub-year plan that will shift people in the direction you will want to go at the start of the next fiscal year. If you filled in an incentive gap by increasing base salaries, you can start to move them back down again. If your employees have been earning 60% of what they earned in better years, you can start to bring that number back up again by developing a more modest incentive program with less leverage than was appropriate in more stable market conditions. In addition, you should consider the culture that has been enforced (or created) by your sales compensation program. Should you add a team-based element to keep the focus on working togethe
    2. You scaled back your expectations in terms of goals or volume production, and now you are starting to see payouts that are far higher than you expected. This is also a situation that has the potential for serious negative consequences on two fronts. First, your company’s financial performance could be adversely affected by overpayment in the incentive program. Second, your employees’ sense of their own value in the market place could be inflated beyond reasonable expectations. It is remarkable how quickly salespeople come to expect a higher level of earnings on an on-going basis once they have experienced it for a few months or quarters. It can be very hard for them to accept the adjustment that will inevitably be required. Quick action is needed to recalibrate expectations, supported by thorough modeling to make sure that pay levels return to appropriate levels without damage to morale, and while still providing significant upside earnings potential for true top performance.
    3. You are finding it difficult to hire top talent, and the reason cited is the lack of a competitive compensation package. You can take a two-pronged approach on this and develop a plan for new hires that would be a lead-in to next year’s plan for the existing staff. Because many companies provide a guarantee for new hires, such an arrangement is possible for a few months before any significant discrepancies in the two versions of the incentive plan are felt. However, you will want to make the transition strategy clear for the incumbents so they know that at a specific future date they will be moved onto the new incentive plan as well. Many salespeople have become leery of 100% variable plans, as they’ve seen what can happen when they fail to cover their draw month after month. Even top salespeople in industries that are highly risk-tolerant may be more interested in finding programs with at least a modest base salary. A 40/60 to 60/40 pay mix is reasonably aggressive, and yet either option allows some degree of control from an employer/employee perspective while providing salespeople with a greater sense of security. Of course, the less variability in the plan, the less leverage on the upside, as this is a necessary trade-off. But it is one that can be designed to provide very attractive earnings opportunities to true top performers.

    Reducing base to bring one sales person into alignment with the rest of the team

    Question and answer format

    Question

    We have one sales rep who was brought in to sell into a different market with a base pay level that is much higher than that of the rest of the team. We have changed our emphasis and he is now selling the same products and in the same role as his 9 peers, but at a higher base. How do we correct his base pay?

    Answer

    This one is tricky as you know, and fraught with opportunities to totally undermine the motivation of Mr. Overpaid. Aligning compensation is the fair thing to do (at least internally). However, a transition of some kind might be a nice compromise so here’s an idea:

    Reduce the base, but fund a guarantee for six months equal to the amount of the base that has been reduced. Then require that the sales person “earn through” the guarantee before additional variable pay is delivered.

    Let’s do an example: 

    > Current too-high base = $80k

    > Appropriate base = $60k

    > New target incentive (once base is $60k) = $40k

    So you’ll need to take $20k out of the base, which is $5k/quarter. The sales person then is guaranteed $20k for the quarter = new base ($15k) + guaranteed variable ($5k). If the person earns less than $5k on the normal variable pay plan, then no additional pay is delivered (beyond the $20k). If they earn $7k (for example), then an addition $2k would be paid.

    Continue this for a very few quarters as a transition, then they would be on the regular plan like that of their peers.

    Clearly, if Mr. Overpaid is not satisfied with the lower base, he will have a look around during those six months, and may move on to a job that meets his needs for less risk if he can find one. Meanwhile, he has a chance to see what his earnings would be on the new plan and re-commit to the job with the new compensation arrangement at the end of six months if it works for him. And the company has established a clear endpoint by which the too-high-base will end.