Editor's Note: This guest post from Bob Malandruccolo has been updated for accuracy and comprehensiveness on June 14, 2020.
The third step in designing sales compensation plans is selecting the Total Target Pay Level for each sales role. Common practices that impact this step are competitive pay analysis, sales compensation philosophy, attraction and retention and total reward strategy.
In the Diagnostic phase of a sales compensation project, a competitive pay analysis is normally conducted. A competitive pay analysis compares base salaries and total cash compensation against actual pay values in the market. This would be an input into the Design Team, and they would use that information along with other insights to determine what the total target pay level should be for each sales role. The 50th and 90th percentiles data points are important and are used as inputs for the Design Team.
Another common practice is that the sales compensation philosophy can direct the Design Team on this step. Many companies select the 50th percentile in the market as the total target pay level for a sales role. Some companies select the 60th percentile in the market and is based on company philosophy and other issues such as the size of talent pool in the market, what is the comparative performance levels among competitors, turnover, other specific or general economic factors.
The next common practice is attraction and retention. If attraction and retention issues are not problematic, some companies tend to not rely heavily on market pricing. In addition to pay, total reward strategy has an impact on total target pay level. Some companies have valued their total reward package and determined where they should select their total target pay levels.
The main topic here has been competitive pay analysis. So I wonder how competitive is your competitive pay analysis? Do you regularly conduct a competitive pay analysis? Are your direct competitors included in the analysis?
However, there is a caution on this analysis. Unless you have specific data from your competitors and that their specific sales roles are exactly the same as yours, the data is only as good as their sources. Competitive pay analysis can help by setting the relative direction for a Design Team, but it is not just the end all. Specific insight is needed from the Design Team in addition to market data.
HERE ARE THE 10 SALES COMPENSATION PLAN STEPS:
Step 1 is defining the Sales Compensation Philosophy or Strategy. It is developed by the Steering Committee and the philosophy guides the Design Team during the design process. Read about this step here.
Step 2 is determining which Eligible Roles are included for sales compensation treatment. Learn more about this step here.
Step 3 is selecting the Total Target Pay Level for each sales role. This represents the mid-point pay level for target performance. You read about this step in this blog.
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. You read about this step in this blog.
Step 5 is choosing the amount of Upside of incentive pay for high performers. Read more about this step here.
Step 6 is selecting Weights & Measures that are linked to incentives for the plan. Learn more about this step here.
Step 7 is determining whether the plan should be based on Commission or Bonus or both. Read more about this step here.
Step 8 is defining the Structure Details of the plan including threshold and excellence levels and the payout curve. Learn more about this step here.
Step 9 is choosing the Frequency of Payouts for each measure. Read more about this step here.
And finally, Step 10 is determining the Administrative Details included in the plan. Learn more about this step here.