• 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

Skill

Experience

Leadership

Long-term potential.

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.

In summary

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:

1. 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
2. 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.

Question

We have one sales rep who was brought in to sell into a different market with a base pay level that is much higher than that of the rest of the team. We have changed our emphasis and he is now selling the same products and in the same role as his 9 peers, but at a higher base. How do we correct his base pay?

Answer

This one is tricky as you know, and fraught with opportunities to totally undermine the motivation of Mr. Overpaid. Aligning compensation is the fair thing to do (at least internally). However, a transition of some kind might be a nice compromise so here’s an idea:

Reduce the base, but fund a guarantee for six months equal to the amount of the base that has been reduced. Then require that the sales person “earn through” the guarantee before additional variable pay is delivered.

Let’s do an example: 

> Current too-high base = $80k

> Appropriate base = $60k

> New target incentive (once base is $60k) = $40k

So you’ll need to take $20k out of the base, which is $5k/quarter. The sales person then is guaranteed $20k for the quarter = new base ($15k) + guaranteed variable ($5k). If the person earns less than $5k on the normal variable pay plan, then no additional pay is delivered (beyond the $20k). If they earn $7k (for example), then an addition $2k would be paid.

Continue this for a very few quarters as a transition, then they would be on the regular plan like that of their peers.

Clearly, if Mr. Overpaid is not satisfied with the lower base, he will have a look around during those six months, and may move on to a job that meets his needs for less risk if he can find one. Meanwhile, he has a chance to see what his earnings would be on the new plan and re-commit to the job with the new compensation arrangement at the end of six months if it works for him. And the company has established a clear endpoint by which the too-high-base will end.

Question

This high-end residential remodeler wants to reward project managers who bring projects in on time and within budget. Given that they have a great deal of control over on-time, on-budget project completion, it was a great idea to provide them with incentives to make that happen.

Answer

In order for incentives to really drive behavior, they need to include both an element of risk (they would earn less than their full market value if they didn’t earn the incentive) and potential for upside (they have an opportunity to earn more than their full market value if they beat their goals).

In addition, the incentive opportunity at target (for at-goal performance) should comprise at least 15%, and probably more like 20-25% of their total compensation. Moving to this sort of pay mix isn’t something to be done all at once — gradually over time is probably best — a value closer to 10% of base as an incentive opportunity in the first year would be a good place to start. Then in future years, base increases could be withheld to fund a more meaningful incentive opportunity.

Identify the measures and mechanics of the plan. If the incentive at target is $10k per year, and if a typical Production Lead is responsible for 5 projects per year, then the “plan” could be a simple as $2000 for each project completed on-time and on-budget, payable following customer sign-off. Consider adding some upside in the form of additional payments for savings vs. budget (e.g., $1000 for each $10,000 in savings) — but be careful about what behaviors are rewarded when choosing this path — you don’t want to jeopardize quality. Also consider paying a portion of the target incentive for almost-there performance (from our example above, you could reduce the payout by $500 for every day late, for example).

The possibilities are endless, but the principles are few.