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What’s so special about compensation for sales professionals?

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May 30, 2019

Sales compensation is unique due to the distinct nature of sales roles. Building an effective sales compensation plan starts with good market data but also requires sound judgment regarding how the data are used especially for particular roles.

For many companies, sales compensation design is viewed as a complex process with noteworthy differences from broader employee compensation programs, including design of variable pay programs, relative mix of fixed versus variable pay, the degree of upside and frequency of payout.

Sales compensation is unique due to the distinct nature of sales roles. For most customers, sales professionals are often the primary face of an organization, giving them a direct impact on business results. Most significantly, many different types of sales roles exist, which is why there is no single “best” or “correct” way to compensate sales professionals.

An important aspect in the design of a competitive sales compensation program is access to good market data. And it is vitally important to know what to do with sales market data once you have it, because many sales compensation decisions are driven as much or more by internal considerations (such as strategic priorities and how your sales roles are defined) as they are by “competitive” practice.

This article will explore three unique aspects of sales compensation program design:

  1. The role of base salary
  2. The delivery of sales incentives
  3. Sales compensation management and administration

The role of base salary

For most employees below the executive level, base salary is the most important reward element to ensure competitive market positioning. But for sales professionals, emphasis on base salary alone is insufficient for two reasons:

  1. Line of sight: Most sales incentive plans are linked primarily to individual measures of performance, which means salespeople can directly drive their earnings, leading them to focus more on their incentive compensation than base salary compared with other employees.
  2. Pay mix: Salespeople tend to have more pay “at risk,” so their salary and related merit increases matter less than for most non-sales employees.

The second of these two points is especially important. For broader employee compensation programs, the proportion of variable pay often increases with career progression through the hierarchy. For sales professionals, the ratio of fixed versus variable pay is instead driven by the nature of the sales role (see Figure 1).

nature of sales roles in defined on two dimensions, transactional and consultative
Figure 1: The Sales Role Framework: The nature of sales roles is defined on two dimensions.

For example:

  • More variable for new business acquisition versus account management roles
  • More variable for transactional versus consultative sales roles

If you only look at base salary levels for sales roles, then you will end up with very misleading conclusions about pay competitiveness. For example, an intermediate-level sales role tasked with driving acquisition of new business may have a greater percentage of variable pay than some senior-level non-sales management roles within an organization.

Furthermore, the degree of variability in pay mix for sales professionals can be substantial. It is common to find one sales role with an 80/20 mix and another with a 50/50 mix or even a 20/80 mix — even at the same grade level.

For these reasons, it is critical to look at market competitiveness for sales roles on a total cash compensation basis.

The delivery of sales incentives

Another important difference between sales compensation and broader employee compensation is the delivery mechanism. Four aspects stand out:

  1. Performance measures linked to quantifiable sales outcomes
  2. The use of formulaic payouts
  3. Greater differentiation in incentive payouts based on performance
  4. More frequent payouts

Each of these four features of sales compensation is directly related to one another. First, sales plans use quantifiable performance measures that are tied to sales outcomes (e.g., sales revenue, sales volume, margin percentage, number of new accounts, retention). This in turn allows for the common use of formulaic payout mechanisms for sales plans.

Typically, there is little to no discretion to determine sales awards, whereas discretion is often the primary differentiation factor for other employee incentives (see Figure 2*).

Graphic showing the trend for sales incentive payouts versus corporate incentive payouts
Figure 2: Incentive Differentiation.

Sales Incentive Payouts Tend to be More Highly Differentiated than Corporate Incentive Payouts.

*For illustrative purposes only.

Lastly, sales incentives are often paid more frequently in an effort to recognize and reward as close to the selling event as possible, but practices vary widely. Typically, quarterly and monthly payments are most prevalent; however, we also see the use of annual plans for sales roles. Additionally, many sales plans use multiple frequencies, paying some incentives quarterly and some annually. In contrast, nearly all corporate incentives are paid annually.

Sales compensation management and administration

Finally, from an administrative point of view, sales compensation requires additional resources to administer — and additional oversight from a governance perspective. From a financial perspective, most sales incentives are “self-funded” based on the sales results generated by each individual, rather than part of an overall corporate pool. As previously noted, often payments are made throughout the plan year, rather than annually.

Perhaps most importantly, the management and administration of sales compensation plans — including plan design, objective setting, performance tracking and reporting, and payment calculations — are often handled by sales operations or finance with little or no interaction with compensation or HR. While it may be typical for sales operations and finance to play a large role in sales incentives, we would argue that HR and the compensation function also have an important role to play in managing and overseeing sales incentives. Using reliable sales incentive compensation design data, HR and compensation can help:

  • Understand the market
  • Give feedback on incentive plan design
  • Provide effective advice to the business to help attract, retain and engage sales professionals

Building an effective sales compensation plan starts with good market data but also requires sound judgment regarding how the data are used especially for particular roles.

HR and compensation have an important role to play to help understand, interpret and apply market data to sales roles to facilitate the design of plans that encourage the behaviors and outcomes you are ultimately trying to drive for the business.

To help companies better understand and address the unique aspects of sales compensation, Willis Towers Watson has just launched a new Sales Compensation and Design Survey. The survey focuses exclusively on roles that are directly involved in the sales process and is aimed at organizations searching for reliable pay level and program design details for sales roles. The survey has been designed in close collaboration with our Sales Effectiveness and Rewards consulting practice, and based on direct input from hundreds of our sales compensation clients in a wide variety of industries.

For more information about the survey, please visit 2019 Sales Compensation and Design Survey.

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