This is always a difficult move and not one that we recommend often. We’ll outline two possible approaches here:
1. Stop base pay increases and add to the variable pay over time.
If you have a pay structure with salary ranges you can red-circle* the reps who are above the salary maximum, and over time hire in newer reps at a lower salary level. From a practical standpoint, the red-circled reps will be ineligible for salary increases unless they are promoted into a position with a higher range, or the range moves for their position based on market adjustments.
The problem with this approach is it does nothing to increase the motivational value of the incentive plan for the reps who have high base salaries, and it also will likely increase your overall cost of compensation if you simply layer on a higher fixed target incentive for all reps in the role, without decreasing base salaries.
2. Treat a portion of the current base as a non-recoverable draw against variable pay during a transition period.
If you find you must decrease base salaries, it is best to do it over time, converting the salary to a draw in a series of steps. Under this methodology, if a rep had a salary of $100,000 that you wanted to reduce to $80,000 with a $20,000 target incentive, you could convert the salary to a non-recoverable draw in $5,000 increments over 3 to 6 month periods. The first $5,000 in incentive earned would cover the draw, and any incentive earned above the $5,000 would be paid as additional income. If the draw is not covered, the negative is not typically carried forward (which is why is it called a “non-recoverable draw”), but if by the end of the transition period reps are not covering their draw they will be in jeopardy of losing their jobs.
This approach allows reps time (typically 12 months) to adjust their finances to the new lower salary amount and to make whatever adaptations are needed to begin earning the additional pay from their incentive. If done properly, the increased upside should more than outweigh the risks for your top performers, but expect that you will have some turn-over among your lower performing reps, and even among some of the higher performers who cannot or will not adapt to the new reality.
*”Red-circle” is comp-speak for freezing base pay at the current level for a period of time.
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.