First, a few points about how pay mix is usually expressed:
Pay mix is the relationship between base pay and variable pay, most often expressed for a role in terms of
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).
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.
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.