Sales Compensation Plans, Step 4: Pay Mix Ratios

 Guest Article for the EcSELL Institute by Bob Malandruccolo

The fourth step in designing sales compensation plans is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance. Common practices that impact this step are competitive pay analysis, industry practices, compensation philosophy, culture and job dimensions.

In the competitive pay analysis, we would know the base salary and total cash compensation levels at different percentiles in the market. For example, if the 50th percentile of base salary is $50k and if the total cash level at the 50th percentile is $100k (meaning that incentive pay would be $50k), the pay mix would be 50/50. So this is one data point in determining what pay mix should be.
 
Another common consideration is industry practice. What is the pay mix for your direct competitors for each sales role? Have you hired sales talent from your competitors? Can a third party assist you on collecting data from your competitors? Are your competitors signaling their pay mix during their hiring process?
 
Another common consideration goes back to the sales compensation plan philosophy. Some companies select that their pay mix should be higher or lower compared to the market. In these days, many companies would like to have a lower pay mix (meaning a lower base salary percentage compared to the market). One of my clients recently hired a new CEO. He wanted every sales role to have a pay mix of 60/40 or lower. It is difficult to change overnight given that most of the roles were paid at a pay mix of 80/20 or higher. And many of the roles were account management roles which were pretty close to 80/20 in the market anyway. My recommendation was not to "shock the monkey" as Peter Gabriel would say, but gradually move into a lowered pay mix strategy over time.
 
Culture is another common consideration. One of my clients had a sales force that had a pay mix of 0/100 meaning pay was delivered by incentive only, no base salary. All of the other competitors had a base salary in addition to incentive. My client's culture inhibited the change until this year. And I started with them 8 years ago and recommended at that time to modify the pay mix.
 
Another common consideration on pay mix is job dimensions. This is where you can find differentiation between business developers, account managers and territory sales reps for example. I use a tool to help my clients to find another data point that gets closer to selecting the right pay mix for the right sales role. CLICK HERE for the SALES COMPENSATION PAY MIX EVALUATOR TOOL 

 
The first column is job dimensions for a specific sales role. The next column shows a range of ratings from 0 to 10. The last column is the rating in terms of a percentage out of 10. The first dimension is the focus of the role. If the role is focused only on selling, the rating would be 0%. If the role is focused on only service, the rating would be 100%. So depending on the focus of the role, the rating would show the percentage within the range. Next would be the selling cycle. A short selling cycle (how about 1 day) would be 0% and a long selling cycle (how about 1 year or longer) would be 100%. The rating could be somewhere in between.

The next dimension is the influence on the sale. If your customers select your product solely because of the sales rep, the rating would be 0%. If your customers select your product solely because of your brand, or your programs or your systems, the rating would be 100% or somewhere in between. Next is about the account sales strategy. If the job dimension is only to acquire new customers, the rating would be 0%. If the job dimension is only to retain existing customers, the rating would be 100%. The next dimension is sales skills. If anyone could be hired into your sales role, the rating would be 0%. If there are specific criteria to hire new candidates into your sales role, such as an engineering or nursing degree, the rating would be 100%. Next is management control. If the sales management process is to kick new hires out of the office and tell them to sell, the rating would be 0%.

If the sales management process is to have sales reps forecasting their accounts, inputting data into the CRM system, having sales managers routinely riding-along with the reps, filling out call reports, needing approval for pricing, etc. the rating would be 100%. The next dimension is product life cycle. If the product is completely new, the rating would be 0%. If the product is mature, such as newspapers or telephone land lines, the rating would be 100%.

Finally, what is the complexity of the sale? If it's low such as selling shoes, the rating would be 0%. If you're selling configured airplanes, the rating would be 100%. An average of all of these dimensions would provide another data point for the Design Team in addition to competitive pay analysis, philosophy, industry practices and culture.
 
Let's assume that the average of all the dimensions average 0%. The tool suggests that there would be no base salary and the role would be paid 100% on incentives. On the other side of the range, if the average is 100%, the tool suggests that there should be paid solely on base salary with no incentive pay.
 
I spent 11 years in the industrial gas business (oxygen, nitrogen and argon) 15 years ago. I have a recent industrial gas client, and I filled out this tool based on my previous experience. It showed an average of 65% which is a pay mix of 65/35. When I reviewed their actual pay mix, it was 63/37. Oftentimes, this tool can approximate reality.

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The first step is defining the Sales Compensation Philosophy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process.  

Step 2 is determining which Eligible Roles are included for sales compensation treatment.  

Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance.  

Step 4 is determining what the Pay Mix should be for each sales role. Pay mix is the ratio between base salary and incentive pay at target performance. 

Step 5 is choosing the amount of Upside of incentive pay for high performers.  

Step 6 is selecting Weights & Measures that are linked to incentives for the plan.  

Step 7 is determining whether the plan should be based on Commission or Bonus or both.  

Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve.  

Step 9 is choosing the Frequency of Payouts for each measure.  

And finally, Step 10 is determining the Administrative Details included in the plan. 

If you want to learn more about Compensation Plan Design Best Practices, request a copy of our Sept 13, 2010 Sales Management Webinar. Leave a comment with your email address or send your request to kshoemaker@ecsellinstitute.com. 

You might also enjoy this great research article from the EcSELL Institute Resource Library titled  "The Myth Behind Planned Obsolescence In Sales Compensation Plans"

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