According to the founder and CEO of a large, public communication company, incentives are everything. “The vast majority of people in companies work for two things: ego and money,” he has said. “What are we incented to do? How are we incented to behave? Incentives drive trained behavior. Period. We don’t spend enough time on getting it right in our company, and I guarantee not enough companies do. As a CEO, I have to hear my CFO and the finance department say, ‘Well you can’t do that because we can’t afford it. We can’t have that much incentive pay.’ That’s absolutely ludicrous. It’s not a question of affordability; it’s a question of sustainability.”
It’s a great point. The sales organization drives the bottom line, whether finance likes it or not (with respect to finance organizations everywhere). And sales people are motivated by their potential earnings. Would a great sales rep work just as hard and bring in as many deals if he were paid a flat salary? Yes, many of them would, but he or she would probably be looking for a new job at the same time.
So how can you responsibly incent, and pay, for the best sales teams out there? Through the correct pay mix and upside (We’ll talk about upside next week).
Pay mix, which refers to the portion of base salary and target incentive an individual in a job earns at quota, is usually the single most influential driver of behavior for a salesperson and the largest financial decision for the company. It establishes the company’s commitment to fixed (base salary) and variable (incentive pay) costs while setting the stage for upside payouts for high performers. A job may have a sizeable portion of pay or a modest portion of pay in target incentive, which reflects the desired role and, if designed correctly, will motivate the right types of behaviors.
Your company may have three job roles – for example, new customer acquisition, current account penetration, and current account management – which may earn the same amount of target total compensation for at-quota performance (let’s say $100,000), but they may earn that pay in different proportions. Those proportions of salary and incentive are affected by factors that include the sales role and sales process. But each type of job should have a pay mix that motivates the right type of behaviors for that job.
A new account acquisition role will usually have a relatively aggressive pay mix, say 50 percent salary and 50 percent target incentive. While their DNA will naturally drive the rep, significant pay at risk supports the types of hunting behaviors we want to encourage with this role. A more complex sales process will sometimes lower the percentage of pay at risk to enable the rep to work through the intricacies and duration of the process as well as multiple buying points in the case of global accounts or government accounts. As new customer acquisition is usually the most expensive type of sale, an aggressive pay mix also puts a large portion of pay in variable cost rather than fixed cost which lessens risk for the organization. However, with risk comes potential reward for the rep. Pay mix carries with it a corresponding amount of upside potential for top performers, usually in proportion to the pay at risk. Total incentive earnings for a top performer may be 200 percent, 300 percent, or more as a percentage of target incentive. If a person in this role earned $100,000 in a year, he would earn $50,000 in base salary and $50,000 in incentive pay. (We’ll discuss upside potential and differentiating top performers later.)
A current account penetration role is busy building relationships and may have a moderate pay mix with 70 percent of pay in salary and 30 percent in target incentive. We want to motivate performance but not typically with the level of risk and corresponding aggressiveness as the new account acquisition role. To maintain a balanced customer solution orientation and achievement orientation, most organizations will offer a pay mix somewhere between 70/30 and 80/20. If a person in this role earned $100,000 in a year, she would earn $70,000 in base salary and $30,000 in incentive pay. This role also receives upside potential relative to the pay she puts at risk.
A sales role concentrating on customer service and revenue retention will usually have a relatively shallow pay mix, for example 90 percent salary and 10 percent target incentive. This minimal risk allows him to have the patience to work through customer challenges and strengthen relationships without the stress of trying to close the next sale. A role of this type with a more complex sales process will usually have a shallower mix than someone with a more transactional sales process, as the complexity will add to the time and patience required to work through creating the right customer experience. If we use a pay mix with too much incentive relative to base, we run the risk of creating a very anxious rep concerned more about attaining a sales result quickly than serving the customer correctly. If a person in this role earned $100,000 in a year, he would earn $90,000 in base salary and $10,000 in incentive pay.
More about incentive pay and upside next week.
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