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Implications for Sales Compensation Design

By: J. Mark Davis, Managing Principal, Valitus Group, Inc.

Part one of this two-part article covered the key drivers of sales role prominence (such as the type of selling, channel orientation, and pricing authority) as well as how to assess the prominence level of a given sales role. To reiterate, prominence is a relative measure of the degree of influence or personal persuasion a sales role has on the customer buying decision. Now that you understand prominence and how to measure it, what do you do with that information? The real meaning of sales role prominence lies in the very clear and direct implications for sales compensation design. Specifically, there are three sales compensation plan design elements that are most affected by a sales role's prominence.

Where Prominence Shows Up in the Sales Compensation Plan

The three sales compensation plan elements most affected by a role’s prominence are the pay mix, upside leverage, and incentive form. For each of these plan elements or decision points, we first offer a definition of terms and then describe how varying levels of prominence are manifested through these incentive plan elements.

• Pay mix – No where is a role’s prominence more impactful on sales compensation design than in the pay mix decision. Pay mix is the percentage of the target total compensation amount that’s provided in base pay versus the percentage provided in incentive compensation for on-target performance. For example, a 60%/40% pay mix on an $80,000 job reflects a plan that pays 60% of the target total compensation amount (or $48,000) in base salary and 40% (or $32,000) in incentive compensation for on-target performance. The higher a role’s prominence, the more pay you can put “at-risk” in incentive compensation (i.e., lower base and higher incentive). This is because a high-prominence sales role has more control or influence over selling outcomes as measured in the incentive plan. Conversely, a low-prominence role will tend to have a less aggressive pay mix reflecting its lack of control over selling outcomes.
  
  
• Leverage - Leverage is the amount of upside incentive opportunity available for "excellence" performance (i.e., often equated with the 90th percentile performance level). In other words, as a multiple or percentage of the target incentive amount, how much more incentive is paid on the upside at excellence? Just as high-prominence correlates to an aggressive pay mix, prominence also positively correlates to the amount of upside leverage provided in the plan. It is common to see high-prominence sales roles paid three times or 300% of the target incentive amount for excellence performance. This is additional reward on the upside to account for the downside risk (i.e., low base pay) inherent in the aggressive pay mix. Low-prominence sales roles will frequently have an upside leverage multiple of 150% to 200% of the target incentive for excellence performance.
  
  
• Incentive form - The incentive form fundamentally reflects whether the incentive is delivered through a commission or a bonus. In its purest form, a commission is the payment of a portion of the business generated without any inherent performance requirement. Paying 2% of gross revenue or $0.10 per unit sold are examples of a commission. The commission provides for a tight, linear relationship between performance and pay (i.e., the more you sell, the more you make). A bonus, on the other hand, pays a portion of a fixed dollar amount for performance against a defined goal or performance requirement. Paying 25% of base salary or a $10,000 bonus for achieving quota are examples of a bonus. A bonus can provide a linear relationship between incremental performance gains and more incentive pay, but the payout curve may also reflect a stair step relationship, requiring achievement of the next higher tier performance level in order to receive more incentive pay (e.g., 100% to 109% of quota pays $1,000, and 110% to 119% of quota pays $1,500). High-prominence sales roles are more likely to be paid in the form of a commission, reflecting their direct influence over selling outcomes. Low-prominence selling roles are more likely to be paid with a step bonus that doesn't as tightly link incremental performance gains with more incentive pay.
  

Aside from prominence, there are two additional factors that impact pay mix: the length of the sales cycle and a role’s barriers to entry.

• Length of sales cycle – The longer the sales cycle, from initial contact to close, the more it will have a moderating effect on the pay mix. For a high-prominence role in a short sales cycle (e.g., 30- days), a 30%/70% pay mix may be quite reasonable. However, for the same high-prominence sales role operating in a long sales cycle environment (e.g., 9- to 12-months), putting 70% of the target total compensation at-risk is likely to create cash flow issues for the seller. In this case, it’s important to have a large enough base salary to sustain a seller over the potentially long, dry period before a sale is made.
  
  
• Barriers to entry – This speaks to the qualifications a candidate must meet to be considered for the job. The greater the number, specificity, and value of these qualifications, the smaller the available labor pool and the higher the minimum economic value of the job. The skill and experience requirement of a high-barrier sales role will typically command some amount of assured income or base salary, despite the role’s prominence. For example, one of my past clients makes and sells cardiovascular implants (e.g., heart valves and rings) to cardiovascular surgeons. All of their sales staff had the minimum required Bachelor of Science, if not advanced, degree in biology as well as years of experience in this market. The job required a high level of clinical acumen to be able to stand toe-to-toe with a cardiovascular surgeon and explain the clinical efficacy of their implants relative to the competition. Not surprisingly, those barriers to entry commanded a high base salary in the market despite the high prominence of the job.
  

Note that I didn’t mention prominence as having an impact on a role’s target total compensation (TTC) level. That’s because prominence is not an indicator of the economic value of a role. For example, a strategic account manager that handles a company’s most important accounts may have relatively low prominence because it sells as part of a large account team, directly or indirectly leveraging multiple resources, and has little pricing authority. However, relative to a territory-based sales rep handling numerous small accounts, the strategic account manager will likely have a higher TTC amount reflecting the strategic value of the role as well as the greater level of skill and experience required to perform the job. While the territory sales rep may have more pay at-risk and more upside potential relative to its target incentive amount, the strategic account manager role will have a higher target total compensation level reflecting its greater economic value to the company.

As discussed in Part 1 of this article, the prominence of an organization’s various sales roles should be regularly assessed, particularly in advance of any planned sales compensation plan change. When the nature of a sales role changes, its prominence may be affected. In order to ensure that your sales compensation plans effectively support the organization’s go-to-market strategy, you must be ready to assess prominence and make the necessary changes to your sales compensation plans that reflect shifting prominence levels in a dynamic business environment.