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Pay mix is the relationship between base pay and variable pay, most often expressed for a role in terms of

% of total cash in the base at midpoint / % of total cash in the incentive at target

so that we might refer to a sales compensation plan as a 50/50 plan or a 70/30 plan (50% in the base / 50% in the variable, or 70% in the base / 30% in the variable).

Because each indivdual’s base salary may not be right at the midpoint for the salary range, pay mix calculated for each person at target would vary in the role. In addition, because variable pay actually delivered usually varies from one person to the next even more widely than base pay, actual pay mix by person (percent of actual total cash from base pay / percent of actual total cash from variable pay) will vary even more dramatically from one person to the next within a role. However, we generally refer to the pay mix for the role, not for one person.

Next, a reminder about how pay mix is usually set (it’s all about “prominence”):

Sales compensation practitioners use the word prominence to mean the degree to which the individual sales person causes his or her sales results directly (through their personal network, credibility, creativity, initiative) vs. all the other causes of a company’s sales success (product characteristics, price, delivery, location, brand strength, marketing programs, partnerships, etc.). The higher the prominence level, the higher the variable portion as a percent of total compensation (and the higher the upside for over-performing). For more about this important topic, see our Talking Slide Show about Pay Mix here.

So, now to our question of the effects of the economic uncertainty on pay mix…

To answer the question about how the current economic conditions should affect your sales team’s pay mix, start by thinking about sales prominence. Has it changed? Do the sales people have more control over their own success, or less? In some companies that are current stimulus beneficiaries, sales success is virtually guaranteed in the next year or so. In many companies hit hard by the Great Recession, near-perfect sales execution will not yield satisfying sales results. Sales prominence is reduced vs. recent years for many sales roles.

If sales roles are now less prominent, does that mean the pay mix should be adjusted?

Perhaps. It is not usually a good idea to adjust pay mix from year to year. While an occasional reset may be needed when pay mix is clearly out of alignment with role prominence, the pay mix should be changed rarely. If the change in prominence is either clearly a short-term phenomenon, or if it is unclear how prominence will settle out once the recession abates, then structural pay mix changes should probably be avoided. If, however, it appears that a changed level of prominence is the new reality for this year and the coming years, then a pay mix change should be considered.

If a shift in pay mix to less risk and upside is warranted, how should that be done?

Fortunately, this is the easier of the two possible pay mix changes to make. The simple answer is that more money is paid in the base (everyone gets a base pay raise), and less is available in the incentive (target variable pay is decreased). However, before making these changes, be sure you have good visibility into the latest information on the market value of the sales job. Market values have fallen in many of the most highly-populated sales jobs in the last few years. Be careful not to raise base pay more than is justified by the current value of the job – it’s very hard to reverse a base pay raise.

Another consideration is that the move of variable pay into the base doesn’t necessarily need to be a 1:1 move. Many people will happily accept $5,000 more in base in exchange for $7,500 less in target variable pay, especially if the target payouts have not been achieved in recent years.

This is a tricky and intricate puzzle, with plenty of good answers, and even more bad ones. This post has touched on some of the top issues and considerations, but hardly every possible condition or available option. Proceed with caution, but if you sense your pay mix is “broken,” by all means, do proceed.

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Business need: Profitable business

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Business need: Growth in sales of new/strategic products/services, or targeted customer types (e.g., new customers or customers in specific industries)

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Business need: Sales over goal/quota

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Business need: Consistent sales performance

Finally, with all these measurement possibilities and linkages on display, we feel compelled to caution you that, when it comes to sales compensation plan design,

Simpler Is Better. Be careful. No Gratuitous Complexity.

Only include these types of components in support of strategic imperatives for the business. And remember that you only really get to "say" about three things with your compensation plan and be "heard." Just because you can, that doesn’t mean you should.

While there is no easy answer to this question, here are three good ideas worthy of consideration:

• Lower the stakes on quota attainment – If your quotas are less accurate than usual, then plan features focused on quota attainment may need to be rethought. Some companies offer binary quota achievement bonuses ($5,000 paid when the quota is achieved), or dramatic acceleration starting when the quota is achieved. These types of plan features put a lot of emphasis on the exact value of the quota. If quotas are inexact, some acceleration might be offered at (for example) 90% of quota, continuing to 110% of quota and then further accelerating. The total payout at target could be exactly the same, but the stakes on an exactly correct quota would be reduced.
  • Risks: Moving to and beyond the exact quota will be less important to sales people.
  • Advantages: Everyone can focus on approaching and exceeding the generally expected level of productivity without a lot of arguments or attention to the exact quotas.
• Shorter measurement periods – Most sales compensation plans are based on an annual goal, with monthly or quarterly payouts for progress towards those goals. If a sales person falls behind early in the year, then they can find themselves “out of the money” for most of the year. Breaking the year into halves or quarters, with separate goals for each, can give sales people an opportunity to get back into the game after a disappointing quarter or half.
  • Risks: Sales people who have not made their total year number may still earn upside in an over-performing measurement period (quarter/half). Mitigate this by offering somewhat less acceleration for over-quota performance. Similarly, the chances of significant under-performance go up when the measurement period is shortened (less time to “catch up” from a disaster), so it may make sense to lower thresholds somewhat if you have them.
  • Advantages: More sales people are working for more of the year with the support of the motivational value of their comp plans.
• Shorter measurement periods, with quotas updated just before the start – In a year when it is very difficult to know what to expect of each sales person by Q4, it may make sense to measure them quarterly or semi-annually and announce the goal for the coming quarter just before the new measurement period begins. This treats each measurement period as if it were a sort of “mini-year,” with an opportunity to adjust as needed based on new insights into business conditions.
  • Risks: This can be a lot of work, almost like doing your annual planning exercise two or four times per year. It also risks offering upside to people who don’t make “their” contribution to the annual plan, and raises the possibility that the sum of all sales goals does not add to the annual plan. As in the prior option, reduce acceleration over quota and lower thresholds when measurement periods are shortened.
  • Advantages: Goals can be made as fair and achievable as possible – not too low and not too high. Everyone is definitely “in the game” at the start of every measurement period, so motivation is maximized.

As such changes are considered, affordability is the right focus for the modeling effort. Make sure the cost of compensation is appropriate and affordable along every section of your payout curve, taking into consideration all the people who will be paid for each sale (the field sales person, their boss, maybe an inside sales person, etc.).

If your plan year is already under way, these ideas may be worth considering as the year progresses if the quotas turn out to be problematic. If they were set too low, it may be difficult to make any changes mid-year. If, however, they were set too high, announcing a mid-year “year end” and restarting with a shortened year, attainable goals, and appropriate compensation mechanics could breathe new life into a haggard sales force.

Better sales compensation plans are only a click away…

Contact us to learn more about how we can help with your sales comp plan designs

Search our library of answers to over 100 tricky sales compensation questions

Review the Seven Signs your plans could be doing more for your business

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• Document the referral. Maybe you create an online form for lead submission, or a process whereby the sales person receiving the lead is expected to document the fact that it was a referral.
• You should probably have some kind of requirement about the depth of the referral. It would not “count” to have someone just provide a contact list or a bunch of possible prospects. A lead on which you want to pay a referral fee is usually based on a relationship and some personal history to give the referral credibility with the prospect. In addition, some limited amount of opportunity discovery work should be expected so that the lead is handed off with some information about the value of your offering to the prospect, the nature and size of the opportunity, key influencers for the decision to buy, etc.
• The payout amount should be enough to be worth the effort for the referrer, and also clearly affordable to the company. It could be (1) a flat amount per referral, or (2) a tiered payout scale with larger deals being paid at a higher rate, or (3) a small commission (a percent of the deal value). Something around 5% – 15% of what a regular sales person might earn on the deal is sometimes a reasonable starting place – though this would depend very much on the nature of your own internal comp plans. If the fee needs to be much more than 15%, of “normal” variable pay associated with a sale, you may have to consider reducing the payout to the sales person to help fund the referral fee to make it affordable – and this is certainly not going to help you sales people want to work those referral leads first.
• Only pay for closed deals – no payment just for the referral. You need top quality leads that don’t risk wasting the time of your sales people. If you pay for referrals, you’re likely to get a lot of them. If you pay for referrals that result in closed deals, that’s what you’ll get.

Referrals are vital to many businesses. Setting up a referral incentive can be a great way to reward those who help create real value for the company.

The bottom line

This is a topic on which sales leaders and finance people have strong opinions. While I’ll discuss some of the nuances around the topic below, my bottom line is that most people should achieve or exceed quota.

To be more specific, more than half of the people should hit or exceed their goal. This would be clear evidence of a “achievable quotas.” While it may be difficult to tell at the start of the measurement period whether or not assigned quotas are truly achievable, it is not at all difficult to tell by the end of the measurement period — if most people achieved the quotas, then they were achievable; if not, then they weren’t.

Why do attainable quotas matter?

1. Motivation. Most people, and even more sales people, want to be “successful.” The quota is the performance standard. People who don’t get there are underperforming, and people who get to quota are performing well, and people who exceed their quota are over performing. The opportunity to be successful, and to be seen as successful, and to enjoy the fruits of success (good variable pay) — these are powerful motivators. Quotas which are out of reach for most people create at least as much frustration as motivation.
2. Management credibility. Attainable quotas are a sign that the company and sales leaders understand their market, their value proposition, and their selling model. Territories are balanced, sales resources are appropriately deployed, and a reliable selling system is in place so that the relationship between sales capacity and sales results is a stable. Sales people like to be part of such a system, customers like to be served by such a system, investors like to invest in such a system. Attainable quotas are a clear sign that this sort of value-creating selling process is in place.
3. Delivering market-competitive pay. Most companies intend to pay their sales people at a level which is competitive for the market. If the combination of base pay plus the incentive that target (at quota) is set so that it will deliver market-competitive pay, then if most of the sales organization does not achieve their quotas you will have most of the sales organization not earning market-competitive pay. Some companies mitigate this risk communicating above-market pay in anticipation of under-performance versus quotas, hoping to actually deliver market-competitive pay median performer. However, you can imagine how assumption-filled the analysis is which connects expected total compensation to market values.
4. Budgeting and performance prediction. For the purpose of predicting the performance of the sales organization and the cost of their compensation, the most straight-forward approach would be based on assuming that average quota attainment is 100% of quota average target incentive earned is a bit more (usually 5% to 12% depending on the amount of acceleration in the comp plan). Trying to predict total sales productivity and the cost of compensation in a business in which quotas are generally not attained can become an exercise guessing, gamesmanship, and frustration for all involved.

This is all about quota — what about the rest of the performance distribution?

If the objective is to maximize the motivational value of the comp plans, the ideal performance distribution is:

• Not more than 5% of the sales people “out of the money” (earning no variable pay), and the these people should generally not be “keepers”
• About 40% of the sales people earning some variable pay, but less than the target amount
• About 45% of the sales people earning more than the target amount, but less than the fully leveraged upside (fully leveraged upside is generally 2 to 3 times the target incentive)
• About 10% of the sales people earning the fully leveraged upside or more.

April 7-10, 2010 — Tucson, AZ

Beth Carroll to participate in a panel discussion: “Incentives and Payment Practices that Work”

Beth will be speaking at the 32nd annual Transportation Intermediaries Association Annual Convention & Trade Show. The Trade Show runs from April 7-10, 2010 and is taking place at the Hilton Tucson El Conquistador Golf & Tennis Resort, in Tucson AZ.  Beth will be speaking on Thursday, April 8, as a panelist during the seminar Incentives and Payment Practices that Work along with panelists Kerry Byrne, Executive Vice President, Total Quality Logistics and Michael S. Brown, Senior Vice President – Sales, Avalon Risk Management, Inc.  The panel will be moderated by Brian Evans, CTB, Arkansas Division Manager of Addison Transportation.

Donya will be leading a workshop as part of the Sales Performance Conference. The conference runs April 20-21, 2010 at the CHF Conference Center in Philadelphia’s historic Old City. The workshop will focus on companies with large sales forces and explore approaches for developing a sales compensation framework that provides consistency across the sales organization while supporting the individuality of the business units.

Use discount code CYGE when registering for the Sales Performance Conference to save $250 off the regular individual registration cost.

By Beth Carroll, The Cygnal Group

Incentive plan measures must be both objective and quantifiable, such as “Total revenue sold in the performance month,” or “Number of new customers with more than $10,000 in margin.” Conversely, performance plan measures can be subjective and qualitative, such as a person’s cooperative, leadership or communication skills. Because so many elements differentiate a successful sales representative from an unsuccessful one, it is critical to create two sets of performance measures: one for the incentive plan and one for the performance management plan.

Performance management is sometimes viewed as a vehicle for delivering salary increases and, therefore, not applicable in a sales environment that doesn’t offer base salaries. This automatic dismissal of performance management might be premature, however. Even if salespeople are on a 100% variable pay plan, a performance review system could be used to provide a foundation for promotions or retention programs, especially in tough economic times.

One challenge of linking sales incentive pay to qualitative “performance” measures may be that a top-performing sales person as measured by your sales incentive plan would not score highly on a subjective performance review. Often, top salespeople are not inclined to be team players. Company leadership will need to determine how important the more subjective qualities are for the long-term health of the organization and focus the performance plan accordingly. If a poorly reviewed sales person continues to receive high incentive payouts and internal accolades, the performance review system is ineffective.

Solve this problem by linking the performance review process and the sales incentive plan through one of two common methods. The first is to rethink your base salary strategy for your salesforce.

If your reps are currently 100% variable, consider adding a small salary in lieu of a draw (the odds are high that your draw is actually acting like a salary anyway, especially if it is non-recoverable). Also, consider making the salary adjustable based on merit. Then, you can really put some teeth into your incentive program by making your target incentive pay a percentage of the base salary. In this way, annual salary increases also will increase the amount of pay earned under the incentive plan. Conversely, a sales person who is not scoring well in the performance review process will see his or her incentive pay stagnate. A word of caution on this approach, however: if salary increases are given primarily for tenure and not merit, it is common to find seasoned salespeople earning a higher incentive payment at below target performance than a new salesperson with a lower base salary who achieves over-target performance.

A second method for linking sales incentives with performance management is to make performance review scores a modifier to one or more elements of the sales incentive plan, with the effect of increasing or decreasing the amount of pay earned under one of the incentive plan measures. For example, the following table could serve as an annual performance review modifier for an illustrative $10,000 calculated year-end payout:

It is almost always necessary to make this linkage on a part of the incentive plan that is paid annually, as very few companies find it practical to conduct performance reviews more frequently. If the majority of pay is delivered on a monthly basis, then an alternative to an annual modifier would be to put in a “hurdle” or qualifier that is tied to a recent performance assessment. Most companies only use this for extreme circumstances, such as when an individual is under a short-term “warning.” The qualifier could have the effect of reducing the amount of incentive pay earned until the warning status has been removed.

Successful companies do not rely on their sales incentive plans alone to drive the required business results. Strong managers and a solid performance review system are the keys to balancing the immediate productivity imperative with the long-term importance of building a sales team that reliably produces results.

By Beth Carroll, The Cygnal Group

“I just don’t understand why we aren’t seeing higher growth! The incentive plan should be highly motivational (it’s 100% variable, after all) and I want everyone to make a ton of money under the plan, but it seems like some of the reps are content where they are.” – Mike Fouts, President, CRST Logistics

The words may be slightly different, but the theme is the same from presidents to front-line sales managers – “why aren’t we getting more growth from our salesforce?”

When faced with this problem, Mike Fouts believed that in large part the lack of growth was due to something amiss in the compensation plan. What Cygnal Group and CRST have learned over the past six months highlights the truism told by every sales compensation consultant to every client – compensation can only go so far. There will always be factors to consider and address when seeking to improve growth. Role clarity is one of the most important factors (and unfortunately, most often neglected) that should be resolved prior to developing a new compensation plan.

The most crucial task for successfully driving growth in any organization is to provide role clarity to the sales reps. This goes far beyond what is typically found in an HR job description and must really address the nature of the selling role. Without accurate knowledge of both parts of the equation: how management wants the salesforce to sell and how the salesforce is actually selling, it will be impossible to design an effective compensation plan.

A rep’s perception of the company’s sales strategy and business objectives is never 100% aligned with that of the management team. Nor is their role, as executed, exactly what management thinks it is, whether it is the amount of time spent with clients versus on administrative tasks (it is always much higher on administrative tasks than expected) or time spent cold calling versus revisiting existing accounts (it is almost always less time spent cold calling than expected). Reaching out to the salesforce through surveys, interviews or focus groups can help identify the gaps so steps can be taken to close them.

Once the gaps have been identified, it falls on management to determine how best to change the reps’ behavior, and then communicate this vision to the reps. Surprisingly few companies actually take the time for this exercise. Listed below are some sample questions that will increase role clarity for both the sales reps and the management team. When reviewing each question, remember the objective is not to simply answer the question and move on, but to have a robust dialog (from different organizational perspectives including sales, finance, human resources and marketing) out of which will come a clear role profile.

1. Is the product being sold as a single product or a bundled solution?
2. How complex is the product being sold? What specialized skills or training are needed to sell the product?
3. How long is the typical sales cycle? Are there key milestones along the way that are tracked by the organization?
4. Who is the primary buyer – is it a single person or a group or team?
5. What is the customer perception of the seller? Is he/she a service provider or a trusted advisor?
6. What will be the customer’s primary decision factor: price or value?
7. What is the typical deal size? (Define this in a relative sense within the organization rather than in any absolute sense, as what is a large deal for one company may be a blip to another.)
8. Where should most revenue come from — new or existing customers? Where does it come from now?
9. Should the rep try to make the most from each deal, or instead focus on building long-term, highly profitable (and stable) customer relationships?
10. How much involvement should the rep have after the sale? What type of involvement (service, installation, collections, complaint handling, billing, etc.)?
11. How many active customers or prospects should an average rep have? How many do they actually have? What’s the reason for any difference?
12. How much time should the reps spend cold calling? How much time do they actually spend cold calling?

Many organizations believe that to have full role clarity, each sales rep must have a unique role and must be compensated uniquely as well. This results in an over-abundance of roles and compensation plans. There is a point of diminishing returns when trying to sub-divide roles into the most precise functions, and one of the keys to successful compensation plan design is understanding when you have reached that point.

Once the roles have been defined, grouping them by selling method can be helpful in understanding when compensation plans can be similar and when they must be different.  The most common distinction used between selling roles is “Hunter vs. Farmer.” Combining a hunter and farmer generally gives you a farmer when organizations typically need more hunters, but there are times when it simply is not practical to have separate roles covering the same territory. In this case, a hybrid role is a practical necessity, but it is even more crucial to go through the 12 questions above and answer each from both hunter and farmer perspectives. The answers will likely be different, and the rep needs to be clear about which hat he/she is wearing and when.  Likewise, the compensation plan developed will need to reflect the proper proportion and put the right emphasis on each role.