Similar to effective performance measures, a sales leader should be able to take a well-designed sales compensation plan and identify the specific job that the plan supports. She should also be able to consider an assortment of sales compensation plans and describe the sales strategy of the entire sales organization. If the plans are designed well, they’ll directly reflect the organization and sales strategy.
In this post, I'll show how to connect four critical compensation levers -- target pay, pay mix, upside potential, and performance threshold -- to sales roles and organizational strategy. I'll also provide questions for sales leaders to ask themselves when defining each factor to make sure they're on track.
Determine Target Pay
Consider the relevant labor market. The talent market might be different than the market in which the business competes for customers. Depending upon the strategy, a sales organization might not source people from the same talent pool as its competitors. Furthermore, within the relevant labor market, a company might choose not to pay at the same level or in the same way as its labor market competitors.
The sales strategy and value proposition to the talent are factors that help determine target pay for each role. Target pay for each role will result in a target total compensation (TTC) -- the starting value that will flow through the design of the incentive plan.
Questions to consider: Has the organization defined its relevant labor market? Is it aiming toward the organization and roles of the future or is it referencing past strategies or assumptions?
Set Pay Mix
Pay mix defines the proportion of salary and incentive at target performance, meaning performance to goal or quota. The total of the salary and incentive at target should equal the TTC for the job.
Pay mix will vary by job type in an organization, and is driven by about 10 factors which include sales process characteristics, types of sale, and types of customers. For example, a role that is focused on new customer acquisition for mid-sized accounts will likely have more incentive pay as a percentage of TTC (perhaps 50% base salary and 50% target incentive) than a role focused on current customer management for major accounts (perhaps 70% base salary and 30% target incentive).
Questions to consider: Do pay mixes align by role? Are there any plans with significant pay at risk driving aggressive behaviors that are out of sync with the desired sales process? Are plans with high base salaries creating a pay entitlement culture?
Establish Upside Potential
Upside potential is the incentive pay available to top performers, typically the 90th percentile, and is often determined as a multiple of target incentive. Upside is a critical component to help the organization attract and retain the best talent in its market.
Questions to consider: Are the top earners really the top performers? Do we significantly differentiate incentive pay for top performers from average performers?
Establish Performance Thresholds
Threshold refers to the entry point of achievement where the plan begins to pay incentive. Threshold usually represents the minimum acceptable level of performance, below which a rep would not typically stay employed with the organization.
Thresholds, again, should reflect roles. A company may have a hard threshold in the case of an account manager with a significant base of retained business. Or it may not have any threshold in the case of a new business developer for whom every sale is incremental growth.
Questions to consider: What’s the minimum acceptable level of performance for a rep to keep her job or to earn any incentive? Are underperformers overpaid?
Only once the C-level goals are understood, the sales roles defined, and the plan is framed on these four factors, it’s time to link the plan to performance. I'll cover this in my next post.
Editor's note: This post has been adapted from the book What Your CEO Needs to Know About Sales Compensation and is reprinted here with permission.