Sales Compensation Planning, Step 3: Select Total Target Pay by Sales Role
Guest Article for the EcSELL Institute by Bob Malandruccolo
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.
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.
Bob Malandruccolo is the founder and principal owner of Sales Force Effectiveness Consulting. With over twenty-five years of practical business, management and consulting experience in sales and marketing, Bob has worked with a broad range of clients from Fortune 100 corporations to small, closely-held firms with special emphasis on sales and marketing process implementation. He has worked closely with his clients through hundreds of successful engagements and implementations across multiple industries (manufacturing, engineering, distribution, software, healthcare insurance, medical products, healthcare, automotive, telecommunications, retail, information handling, media).