The question: Should we be using our standard annual merit pay adjustment process with our sales team’s base salaries, or should we just expect them to earn their own raise through increased sales?
The answer will depend on a few characteristics of your company, your sales jobs, and your sales incentive plans, so find your situation below for some best practice pointers.
If you’re in an early stage business with less than 50 sales people, or if most of your sales people have at least half of their annual compensation coming from their commission or variable pay…
In this case, it is most common to find that base pay is adjusted rarely, if ever. Adjustments are usually triggered by significant increases in responsibility (quota size, team lead, etc.), and are not done on an annual cycle. Over the long run this may lead to a very incentive-rich pay mix as the most tenured sales people build a book of business which rewards them more and more while their base pay stays the same, potentially over many years.
This may eventually require adjustment via increased base pay and a change in the core incentive structure as the business matures and the focus of the relationship with the customers shifts from being primarily with “their” sales person to being a larger overall relationship with your company. But in many businesses, this arrangement can persist for years and is a sensible approach.
If your business is more mature, your sales force is larger, or if your sales people have a more base-rich pay mix (60% or more of total compensation at target in the base)…
This indicates that your sales people are probably part of a larger selling team and/or your brand and customer relationships are strong enough that the customer would see their relationship and decision to buy as more influenced by the company than by the specific sales person. This doesn’t mean that the sales person is unimportant, just that they are executing their part of an overall customer life cycle that is primarily orchestrated by the company.
In this case, it’s important to maintain the pay mix. So expecting the sales person to “make their own raise” would eventually result in a pay mix that is too incentive-rich, and run-away compensation amounts for the most productive sales people. So, to keep the pay mix in balance, the base and variable sides must be managed. Some businesses manage the base through the regular annual merit cycle so that each person’s base is adjusted based on standard company criteria. At the same time, the variable opportunity at target is generally increased in alignment with the annual merit guideline.
In other businesses, the base pay and total compensation for sales are managed, but not necessarily on a strict annual cycle. Adjustments every two or three years can also work well to manage position against market as well as pay mix. And, of course, there will be a need to do some between-cycle adjustments for specific situations as they arise. However, it should be noted that there’s usually more required in these businesses than just making the sales numbers, and the annual performance management, assessment, and merit adjustments provide a good opportunity to reward for all the things that matter and that may not be directly reflected in sales results each year (skills, experience, leadership, long-term potential).
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.