Editor's Note: This blog has been updated for accuracy and comprehensiveness on June 16, 2020.
Sales compensation plans. They are only as effective as the behavior they drive. Recently, there has been a lot of concerns about ensuring that on target earnings (OTE) are in line with industry peers. Paying a competitive mix of base salary and variable is critical to attracting top sales talent. The problem is many Sales Managers don't go beyond assessing total earnings.
Purchasing compensation data from Radford, PayScale or Salary.com is the first step in determining if your pay levels are comparable with world class, but it doesn’t tell you how to pay your sales reps. If the base-variable mix isn't right, your best people will leave and your worst people will stay forever.
These sales compensation strategies were outlined by Ryan Tognazzini of Sales Benchmark Index. The downstream effect of paying the wrong mix of base and variable is threefold:
- Can’t attract ‘A’ players
- Can’t keep ‘B’ players
- Can’t shake ‘C’ players
The Problem: The best sales reps want the best compensation plans. If your sales compensation model doesn’t allow your top performers to make a killing for world class performance, ‘A’ players won’t be interested.
The Fix: Make sure the leveraged component of your compensation model rewards your 'A' players. Your top performers should make 3X to 4X your bottom performers.
The Problem: ‘B’ players are your developmental bench to become future stars. If your plan doesn’t allow them to earn a living while climbing their way to the top, they will grow impatient and leave.
The Fix: Test your current sales compensation model to determine the excitement level of the plan. At what point does the leveraged component begin paying for performance in a way that will create excitement for your ‘B’ players.
The example here illustrates an issue your compensation model may have in driving excitement as your reps near 100% of their goal. If I continue to improve my performance, yet the upside is relatively small, I’m not motivated to keep pushing for the next level of success.
The Problem: If your sales compensation model has a healthy base salary, you might think this is the key to attracting ‘A’ players to your organization. Wrong. ‘A’ players want an attractive OTE and are willing to put more at risk for a bigger upside. Big base salaries attract ‘C’ players who live off their paychecks and don’t sell for your organization.
The Fix: Review your sales compensation model to determine if your OTE is at the 60th percentile of your industry peer group. From there, determine if the base-variable mix is in line. Fund the 3X compensation for the ‘A’ players by starving your ‘Cs.’ The ‘Cs’ will leave and go work for your competitors.
Check out more blogs about sales compensation plans here.