April 19, 2015
In our last newsletter, we set the stage for understanding why the salesperson’s unique role in an organization demands a unique compensation and reward system. We noted that the salesperson’s importance to bottom line organizational results means that compensation must be more than just payment for a job performed, but also a motivator for continued performance excellence. And finally, we looked at how it is essential to understand the salesperson’s job, their necessary skill set, and their working environment in order to establish the proper pay level targets.
Of course, appropriately compensating a salesperson goes deeper. You need to strike the right balance between fixed and variable pay, quantify the “upside potential” and determine other key components and their weighting factors. So let’s dig in:
Finding Balance in the Mix
Traditionally, the salesperson’s compensation is a mix of fixed (or base) pay and variable (at-risk or incentive) pay. But what is the right mix of these pay types? Usually, your market (including your industry and location) will dictate what is appropriate. To be competitive in attracting and retaining sales talent, your compensation mix should be market-appropriate. In other words, if your competitors offer a 50/50 mix of fixed to variable pay, you might have trouble attracting salespeople if your sales compensation leans too heavily on commission; and you might have trouble retaining sales performers if commissions are not a rewarding and motivating part of their compensation.
You can establish a Target Mix of, say, half fixed and half variable pay. This is the amount you forecast as being the likely payout based on performance expectations and budget. Your Actual Mix, however, will likely vary somewhat once performance results are in for a given period. Your 50/50 Target Mix, based on $50,000 base pay and $50,000 in commission pay might end up as an Actual Mix of 56/44 if the base of $50,000 is augmented by only $40,000 in incentive pay.
How can you decide how much emphasis to place on each part of the mix? Again, it can depend on your market, but here are some rules-of-thumb: Place a heavier emphasis on base pay if:
- Sales is more of a team effort
- Heavy use of advertising and promotion means that little sales effort is required (in other words, if market awareness is so high that the salesperson is more of an order-taker than a persuader)
Place a heavier emphasis on incentive pay if:
- The sales role requires a high level of skill and drive
- The company is not well-known
- Competition is strong
- The market opportunity is high
What’s the Upside?
Another factor to consider when constructing the pay mix for a salesperson is the “upside potential.” Simply put, if the target is $10,000 but the salesperson could earn another $10,000 on top of that, the upside potential is 1:1. If the target is $10,000 but the salesperson could earn an additional $20,000 over target, the upside potential is 2:1. Keep in mind how much upside potential the salesperson could earn and how many salespeople might actually be able to achieve that level of results when setting your upside potential.
Factoring in Key Components
Beyond pay mix and upside potential, you will need to consider other components and how they should be weighted when compared to one another. Components to consider can fall into categories that include:
- Financial or production
- Strategic
- Input or activity
- Subjective or judgment
Financial components typically focus on sales dollars, margin or margin dollars, or units. These are mostly measured in volume. Strategic components focus on specific customers or products, or on measures that drive a strategic priority. Activity components focus on a sales rep’s specific activities, events or milestones. And subjective or judgment-based components should normally be less prominent (and carry less weight) because they relate to objectives that are observational, and have less quantifiable results.
When determining which components to include in order to evaluate and reward the salesperson, limit the total number to five or fewer; and do not include any that you would weight at 10% or less in the mix. In addition, each included component should be:
- Controllable by the salesperson, with the link between sales performance behavior and results clearly relatable and understood.
- Measurable with metrics that will drive appropriate behavior and that, for higher incentive pay mixes, have a clear “line of sight” to the outcome.
- Aligned clearly between the business strategy and overall corporate performance.
In general, whatever weighting factor (as a percentage) you give a component, make sure it reflects and supports corporate priorities and direction as well as the desired results for the component. If a component is an aggregate corporate number toward which the sales rep’s performance has little input or effect, it should be given lighter weight than direct-impact sales performance components
Bottom Line:
Proper compensation for the salesperson requires careful analysis and structure. It requires big-picture perspective along with focus on specific performance factors. Between our previous article and this one, we’ve covered many of the considerations for effective salesperson compensation, but there is more to share. Next time we’ll look at the mechanics of salesperson compensation planning, as well as how to implement, communicate and evaluate the system. To discuss what we’ve already covered, what’s to come, or your specific compensation program needs, contact Total Reward Solutions today at 317.589.8529.