Incentive Compenstation: Getting it Right (Part 1 of 3)

In designing comp plans, there are many factors to consider. Over the next three editions of this blog, we will take a closer look at three key factors:

1. Target Compensation (Part 1)
2. Base-Variable Mix (Part 2)
3. Variable Metrics (Part 3)

Part 1: Target Compensation 

How much should your sales reps be paid in total target compensation (base+variable)? To start, think about what the role requires, what you can afford, what the customer expects and how your peers pay their reps.

• Role Requirements – Are you looking for a recent college grad or someone who has 10 years of high-level success? Your expectations of experience, productivity and recent results will help. Who is best-suited for this job? What kind of training and investment will you need to make to ensure the success of your reps? Is this a long-term position or a stepping stone? Entry-level sales jobs turn over with high frequency, while executive-level jobs are scarcer and more coveted. Be honest with yourself and think about what is realistic.
• Budget – What can you afford in terms of cost of sales? Look at the profitability of your products and services and determine what you can realistically afford to pay your people. For some organizations (software and services) that have higher margins, companies pay a higher cost of sales because the overhead is low. In some cases, cost of sales can be 35-50%. In product-based industries where there are heavy expenses for manufacturing and inventory-carrying costs, it may make sense to pay closer to 10-25% cost of sales.
• Customer Expectations – Who will your reps call on at the customer level? Are they middle managers or high-level executives? Do they expect subject matter experts or someone who can help them through a transaction? Can the rep sell all things to all people (generalists) or do you need specific industry or vertical focus (specialists)? Matching the role profile to the customer’s expectations will help determine who you should look for and what they might cost.
• Benchmark – Try sites like Salary.com or Payscale.com to better understand job descriptions and target compensation for the roles. What are your peers paying their people and are your expectations realistic? If you find the answer is similar to the example below, perhaps it’s time to consider making some changes.

Still unsure about how to combine these ingredients into a comprehensive solution? Try using a Venn Diagram to list all of the attributes you want for each category. It’s a great visual tool to help sort out your thoughts and bring clarity to the problem. Look at the commonalities from each circle and begin to craft your solution accordingly.

Stay tuned for part two where we take a closer look at base-variable mix and how to determine if you’re on the right path.