Setting an appropriate pay mix for your sales compensation plan — the ratio of target total cash compensation that is attributed to base salary vs. target incentives — is a common pain point for growing companies aiming to maintain competitive sales compensation structures.
To start, companies don't always consider the goals behind their pay mix approach. The purpose of pay mix is to help establish the right motivating balance between risk and reward for employees with influence over sales outcomes. As jobs take on more influence in the sales cycle, the proportion of pay tied to incentives should typically rise, propelling incumbents to more aggressively seek sales wins.
Next, pay mix works in conjunction with a plan's payout curve to determine leverage — the rate of target cash compensation earned at various levels of performance. High leverage provides sales team members with an opportunity for accelerated pay outcomes as performance exceeds target (e.g., a plan with a 5x payout rate for above-target performance vs. a straight-line approach with a constant payout rate at all levels of performance, either at or above target). If the goal is to drive outsized performance, leverage should be increased, but this could mean introducing more risk for employees. Again, the balance of risk and reward should be considered.
Pay Mix Disparities
In our consulting experience, we commonly see disparities in pay mix following acquisitions or periods of rapid growth. Mergers and acquisitions can suddenly bring together like jobs with dissimilar pay mix strategies. And rapid hiring often occurs at times when companies have limited infrastructure in place to ensure pay practices remain consistent.
Inequities notwithstanding, many companies maintain dissimilar pay mix levels as a path of least resistance based on specific negotiations with employees. Indeed, most sales professionals don't appreciate a reduction to their regular earnings following an increase in incentive mix. Meanwhile, a shift in pay mix in the other direction, to increase pay tied to base salary, can frustrate high performers who then have less leverage for high pay outcomes. Overtime, this approach can compound into a highly uneven system across a sales team.
Making it Right
To set the appropriate pay mix for a job, start by looking at the competitive target total cash compensation level for the role. Ultimately, your plan needs to deliver competitive pay for target performance. Of course, this is easier said than done.
If your company has struggled to deliver near target pay to the median performer, then you might need to use a mix that's heavier on base salary than what the market suggests. Alternatively, if you can demonstrate consistent, above-target earnings for more than 40-50% of your sales team, and this performance translates to the company consistently beating its revenue goals, then you're better off with a pay mix that's heavier on incentives.
So, why not just peg pay mix to your peer group's data? Certainly, Radford-reported pay mix data can be a key input for your decision making process. However, you may discover some differences in pay mix across different sets of peers. Internally, we reviewed pay mix levels for two types of account manager jobs within a targeted cut of 30 similarly-sized software companies participating in Radford's Global Sales Survey database. The group was then subdivided into the 15 top- and bottom-performers by 1- and 3-year revenue growth rates. Interestingly, pay mix levels were more heavily weighted toward incentives at top-performing companies, indicating the importance of corporate performance when building peer groups and benchmarking pay practices. Clients are typically surprised by this finding, often believing there is no correlation between pay mix and corporate performance.
Looking ahead, before you ratchet up the incentive mix for your line sales jobs, consider all of the factors unique to your company and the particular job in question. These factors include your company's brand equity, the product's complexity, a sales role's degree of service vs. sales responsibility, and the number of accounts covered by a particular person. Taken together, these factors can have considerable influence on an employee's ability to leverage their incentive target.
To learn more about participating in a Radford survey, please contact our team. To speak with a member of our compensation consulting group, please write to firstname.lastname@example.org.