Tag Archives: Pay mix

What your CEO needs to know about your sales comp plans

CEOs don’t need to understand the details of the sales comp plans, but they do need to make sure that a few things are working correctly. Here’s a check-list for what you should be able to demonstrate to your CEO in your next plan review/approval meeting:

  1. The plans are simple and easy to understand. You can explain them to a high schooler who isn’t math-inclined, and they understand them.
  2.  The sales leaders believe the plans are right, and know how to use them to help manage and motivate their team.
  3. The amount of at-risk pay increases with increasing ability to influence individual measurable sales results. And those with less direct influence over results have less risk and upside in their plans.
  4. All incentive measures are objective and financial, except for those used in sales roles with very long sales cycles (market development, huge contracts…) .
  5. If you ask a sales person what they need to do to really make money on your plan, their answer is the same thing you actually want them doing.
  6. The cost of compensation works in your business model. Over a multi-year period, comp cost per person goes up with the labor market (3% or so on average across the team) while sales volume per person goes up faster (5-25%, depending on the stage of the business). This is because the sales leaders are adding to the selling capacity of each person through great tools, smart organization, leveraging good marketing, the right coverage model and market strategy.

How do we move our pay mix so that there’s more in the incentive and less in the base?

This is always a difficult move and not one that we recommend often. We’ll outline two possible approaches here:

1. Stop base pay increases and add to the variable pay over time.

If you have a pay structure with salary ranges you can red-circle* the reps who are above the salary maximum, and over time hire in newer reps at a lower salary level.  From a practical standpoint, the red-circled reps will be ineligible for salary increases unless they are promoted into a position with a higher range, or the range moves for their position based on market adjustments.

The problem with this approach is it does nothing to increase the motivational value of the incentive plan for the reps who have high base salaries, and it also will likely increase your overall cost of compensation if you simply layer on a higher fixed target incentive for all reps in the role, without decreasing base salaries.

2. Treat a portion of the current base as a non-recoverable draw against variable pay during a transition period.

If you find you must decrease base salaries, it is best to do it over time, converting the salary to a draw in a series of steps.  Under this methodology, if a rep had a salary of $100,000 that you wanted to reduce to $80,000 with a $20,000 target incentive, you could convert the salary to a non-recoverable draw in $5,000 increments over 3 to 6 month periods.  The first $5,000 in incentive earned would cover the draw, and any incentive earned above the $5,000 would be paid as additional income.  If the draw is not covered, the negative is not typically carried forward (which is why is it called a “non-recoverable draw”), but if by the end of the transition period reps are not covering their draw they will be in jeopardy of losing their jobs.

This approach allows reps time (typically 12 months) to adjust their finances to the new lower salary amount and to make whatever adaptations are needed to begin earning the additional pay from their incentive.  If done properly, the increased upside should more than outweigh the risks for your top performers, but expect that you will have some turn-over among your lower performing reps, and even among some of the higher performers who cannot or will not adapt to the new reality.

*”Red-circle” is comp-speak for freezing base pay at the current level for a period of time.

Managing base pay for sales roles

Not managing base is a relatively common practice. It’s not a best practice in my opinion, but it’s not unusual. There’s a philosophy that says

  • Make your own raise – sell more
  • We like to keep our fixed cost (base) low and don’t mind if people are paid well as long as they have produced (higher risk, upside).

A better approach is to manage your base (+/- 20% of a range midpoint) if you can clearly articulate what you are paying for in the base, and what you are paying for in the variable pay. A good starting place would be…

Base pay is for

Skill

Experience

Leadership

Long-term potential.

Variable pay is for contributions to company success this year, ideally directly affecting the income statement.

If you don’t have a solid performance management system, you may find that latitude in base pay levels will result in not-best-practice practices. Some I have seen include…

  • Base pay raises to underperformers to “keep them whole,” sometimes (and you can’t make this stuff up) accompanied by low/no raises to top performers because they already got their money via the variable pay plan
  • Everyone at the top of the range – so no differentiation in base
  • New hires coming in at a higher base, because that’s what it takes to get them in the door, so that green and less skilled sales people have the highest base pay levels.

All of this is to say that there are potential pitfalls of managing base within a range, and if you aren’t ready to support it with solid performance management, put that foundation in first. But once you do have that in place, you will find that managing base pay within ranges has these advantages:

  • You have a way to differentiate pay for people who are highly valuable that does not rely on this year’s sales results
  • You can manage your base pay ranges so that they increase over time, along with the variable piece (if you don’t do this, you will end up with a pay mix that is inappropriately incentive-rich because variable will grow while base stays the same)
  • If you do decide to change your pay mix to be less incentive-rich (which would be the typical change as a company matures over the years), you will be able to directly control the base pay levels and ranges so that you can do this gradually over time.

In summary

A key concept to keep in mind is that while base pay should vary, variable pay should vary more. We have seen companies with a substantial investment in variable pay (the actual payouts + the design, administration, and management of the plans), with the variable pay not actually varying much from person to person/year to year. Keep these two ideas in mind as you manage base pay:

  1. If you’re going to have a variable pay plan, use it to meaningfully differentiate pay for short-term (year, quarter, month) measurable performance, and
  2. If you’re going to have base pay, manage it, varying base pay levels to differentiate among people based on value-creating attributes that don’t change year over year.