Not managing base is a relatively common practice. It’s not a best practice in my opinion, but it’s not unusual. There’s a philosophy that says
- Make your own raise – sell more
- We like to keep our fixed cost (base) low and don’t mind if people are paid well as long as they have produced (higher risk, upside).
A better approach is to manage your base (+/- 20% of a range midpoint) if you can clearly articulate what you are paying for in the base, and what you are paying for in the variable pay. A good starting place would be…
Base pay is for
Variable pay is for contributions to company success this year, ideally directly affecting the income statement.
If you don’t have a solid performance management system, you may find that latitude in base pay levels will result in not-best-practice practices. Some I have seen include…
- Base pay raises to underperformers to “keep them whole,” sometimes (and you can’t make this stuff up) accompanied by low/no raises to top performers because they already got their money via the variable pay plan
- Everyone at the top of the range – so no differentiation in base
- New hires coming in at a higher base, because that’s what it takes to get them in the door, so that green and less skilled sales people have the highest base pay levels.
All of this is to say that there are potential pitfalls of managing base within a range, and if you aren’t ready to support it with solid performance management, put that foundation in first. But once you do have that in place, you will find that managing base pay within ranges has these advantages:
- You have a way to differentiate pay for people who are highly valuable that does not rely on this year’s sales results
- You can manage your base pay ranges so that they increase over time, along with the variable piece (if you don’t do this, you will end up with a pay mix that is inappropriately incentive-rich because variable will grow while base stays the same)
- If you do decide to change your pay mix to be less incentive-rich (which would be the typical change as a company matures over the years), you will be able to directly control the base pay levels and ranges so that you can do this gradually over time.
A key concept to keep in mind is that while base pay should vary, variable pay should vary more. We have seen companies with a substantial investment in variable pay (the actual payouts + the design, administration, and management of the plans), with the variable pay not actually varying much from person to person/year to year. Keep these two ideas in mind as you manage base pay:
- If you’re going to have a variable pay plan, use it to meaningfully differentiate pay for short-term (year, quarter, month) measurable performance, and
- If you’re going to have base pay, manage it, varying base pay levels to differentiate among people based on value-creating attributes that don’t change year over year.