In the first “Back to Basics” blog, we covered incentive compensation plan eligibility and guiding principles. In this blog, we want to turn to targeted pay level and mix. By “target” pay level, we mean the pay level that the “average” salesperson will earn for achieving expectations (often 100% of sales quota) in a given year. When we say “target” mix, we mean the way that total pay is delivered – either in base salary or in incentive pay. The mix is normally stated as a ratio, first with the percent base salary, and then the percent incentive. For example, if a job with a target pay level of $100,000 has $70,000 of that delivered in base salary, we would say that the pay mix is 70:30.
Step one in establishing a targeted pay level and mix is finding good market sales compensation data. For some industries, such as technology and pharmaceuticals, there are industry-specific studies that cover the vast majority of roles. For other industries, you may need to turn to a broader, all-industry survey such as those conducted by the HR houses.
When you match your sales roles to the jobs in the survey, make sure you match to the job descriptions in the survey and not simply by job title. Also, you may not find exact industry matches to yours. In these cases, match to the labor pool, not the industry – in other words, which industries do you hire from and lose people to? These should provide good insight into which industries to compare.
The final input is the desired percentile you want to match to. This largely comes from your compensation philosophy and company culture. The majority of companies match their base salary, target incentive, and total pay against the 50th percentile, or median (within 10 percent of the median is generally considered to be “at market”).
But, perhaps your incentive compensation philosophy is slightly below market on base (say, 40th percentile) and well above market on incentives (say, 75th percentile). This pay mix sends a very different message to the market about the type of salesperson you are seeking – an aggressive salesperson seeking high risk-high reward.
Other companies may have a more paternalistic or conservative culture and benchmark above market on base salary (say, 65th percentile). This type of strategy assures your base salary will be more than competitive, but will not attract the most aggressive salespeople on the market. Depending on your organizational culture, that may be exactly the type of sales personality you are seeking.
The last thing to consider in benchmarking pay level is benchmarking not just the “target” or average pay levels, but also the high and low performers. In other words, ensure you pull the 10th and 25th percentiles from the market study and compare them to your own 10th and 25th percentiles to see how your low performers are paid vs. market. Similarly, benchmark your 75th and 90th percentiles against the market. Even when your target pay is at market, you may find that your low or high performers are not at market.
Next week’s post will focus on plan metrics.