We have two sales VPs with remarkably different team revenue quotas. One at $12MM/yr, the other at $20MM. To date we have targeted the same variable comp for each in part because it was competitive but also necessary to recruit the one with the $12MM quota . Should the VP with the higher quota have a higher target incentive?
When it comes to sales leadership roles, there is oftentimes dramatic variability in quota sizes without significant variability in compensation levels. While it may take more effort and skill to manage a larger quota, it’s also the case that in sales leadership lower quotas are often associated with market development and team construction requirements, which may actually take skills and initiative not required in the ongoing management of a well-penetrated region. One useful “test” here is to ask if the people were switched, would the quota change. Consider these questions:
- If Mr. $20M were to be assigned Ms. $12M’s team, would the $12M go up?
- Is Ms. $12M capable of doing Mr. $20M’s job?
- Does one of these jobs take more Skill, Experience, Leadership ability (SEL) than the other?
- Are these two people in different levels of leadership, or are there just different expectations based on what is expected from their sales team’s specific assignment?
If it’s the assignment, then there’s a strong argument to keep the target incentive the same. If it’s different levels of leadership, then both base and target incentive should likely be higher for Mr. $20M.
Avoid the use of a true commission for sales leaders.
Regardless of your answers above, I would caution you against proceeding with any kind of commission concept for a sales leader. If you step away from market-based comp, you’re on a path to serious comp excess if/when the business scales. I could tell you stories of VPs of Sales earning $1.2M at target in $1B divisions of $15B companies that should know better. Then when they inevitably have to unwind it because market comp is $500k or so, it’s a real disaster for the sales leader, the sales team and the business.
Increase base to recognize superior persistent attributes IN the same job. Increase the base pay range, base pay and target incentive to recognize a higher level of the leader job. But stay away from any kind of % of sales concept for sales leaders.
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
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.
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:
- 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
- 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.
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.