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Smart Management: The Compensation Paradox
May 06, 2008
Just how much are outstanding sales results worth?
By David J. Cichelli
How much to pay salespeople is a common challenge for management. Fortunately, it's one that can be solved through some simple principles, including rules for setting the right pay levels for outstanding performers.
In many sales organizations, the best performers don't just contribute substantial revenue results—they also act as positive role models. Their insights are invaluable and their informal leadership is critical. Accordingly, providing the right rewards to these top contributors is an important objective for sales leaders.
Selling roles fall into two main categories: income producers and sales representatives. The pay principles for each role differ substantially. Income producers are paid a percent of production (often sales revenue or gross margin dollars). Income producer jobs include real estate, traders, insurance agents, stockbrokers and manufacturer representatives. While the commission rates for these jobs seldom change, the head count varies based on the volume of business in the market. Income producers normally sell commodity products and can easily move their customers to new employers. In short, if they sell a lot, they get paid a lot.
Companies employ sales representatives to present their value proposition to current and prospective customers. The company's value is inherent in its unique products and services … not exclusively in the relationship of the salesperson with the customer, as in the case of income producers. Companies set target pay rates for sales representatives using market surveys. Companies pay great performers above this target pay rate, while poor performers are paid below this amount.
In the world of sales compensation design, income producers have a target commission rate and sales representatives have a target pay rate. These are two very different systems. While the principles that follow apply to sales representatives, income producers have their own set of principles to address issues such as splits, pools and trailing credits.
Refer to the following three principles for guidance when making your sales design decisions for outstanding sales representatives:
1. Utilize market data to set target pay rate. Most industries have published survey data for setting target pay rates. Some companies price their jobs above the market, others at (or even below) the market. If territories are dissimilar in size, then use territory-based quotas to equalize earning opportunities.
2. Set the mix using degree of persuasion. Splitting the target pay into a base salary and a target incentive amount depends on the degree of persuasion in the sales jobs. When the seller can drive customer buying decisions, set the base salary low—but not below 50% of the target pay. When buy decisions are driven by customer internal needs, set the base salary portion higher (such as 80% of the target pay rate). The average pay mix for U.S. sales representatives is 70/30, but this number varies by industry.
3. Set upside earnings at the 90th percent of the market. A good market survey provides market rates data for the 90th percentile. Use this number to set your payouts for your best performers. A common shortcut to arrive at this number is to take three times the target incentive, then add this figure to the base salary portion.
For income producers, their upside earnings are unlimited and uncapped; the more they sell, the more they are paid. Don't be alarmed by high payouts. For sales representatives, use salary surveys to set a target pay rate. Ensure that the best performers can earn equal to or better than the 90th percentile in the marketplace. Lastly, remember that a well-designed plan for sales representatives should also be uncapped.
Davd Cichelli is the senior vice president of The Alexander Group in Scottsdale, Ariz. He can be reached at edit@salesandmarketing.com.
Sales & Marketing Management Magazine
This article is brought to you by Sales & Marketing Management, the leading authority for executives in the sales and marketing field.
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