HomeSpecial ReportCracking the Sales Compensation Code

Cracking the Sales Compensation Code

A competitive salary is ‘table stakes’ for creating an effective pay package

When we spoke with Henry Glickel, president of Sales Recruiters Inc. in Salem, New Hampshire, he said he had recently fielded a call from an HR executive at a large shipping company that was looking to expand and wanted to hire several hundred new salespeople. Glickel’s company helps B2B companies nationwide across a diverse range of industries fill open sales positions. Filling such a large number of positions would mean over $1 million in revenue for Sales Recruiters, Glickel said, yet he turned down the business.

“They have other issues they have to acknowledge and resolve before talking about recruiting,” he explained. Among them, the company didn’t have a competitive pay plan with strong benefits. Glickel said his company has a stellar record of placing sales professionals with companies long term and he didn’t want to mess with that, even if it meant passing on such a significant amount of business.
“They don’t have a good process to get the right funnel of people into those positions,” he said. “I told them, ‘When you guys decide to address these other issues, we’ll decide to help you.’ ”

Salary Strategies Can’t Be Stagnant

Glickel’s reluctance to take on such a lucrative contract until the client has the right compensation plan in place speaks volumes about the importance of salary in today’s highly competitive sales world. “Wages are table stakes,” he said. “If you’re not competitive on wages, you can forget about all the other stuff.”

To be sure, “all the other stuff” — a strong corporate culture, flexible work schedules, remote work opportunities, ongoing skills training and more — are critical to recruiting top talent today. The recruitment experts we spoke with for this report emphasized that companies with low turnover rates are led by executives who understand that money alone is no longer an effective retention tool. However, companies must start at a point of paying competitively or they won’t get a sniff from top sales talent. That requires comprehensive and accurate knowledge of compensation data in your industry.

“Accurate and timely compensation data hold even greater value this year as a new post-pandemic normalcy begins to take shape,” states a Mercer blog post. Just as most everything else in work environments has shifted since the COVID-19 pandemic changed the world, economic factors have affected pay, sometimes dramatically, but not uniformly across industries, Mercer reports.

“Significant changes in job skills and performance have led to changes in compensation strategy as well. Some jobs have changed so dramatically at a skills level that they may not even resemble the same position as in prior years,” the Mercer blog states. “Many jobs will now need to be evaluated and remapped to survey data and the compensation plan
re-evaluated.”

The 2020 Mercer Benchmark Database median base salary increases year over year were relatively homogenous across will likely struggle to retain top talent, the salary consultants we spoke with said.

How should base salary and commission be divided? “You want them to be able to eat hamburger, not steak” from the base salary portion of their compensation, said Mark Thacker, president and co-founder of Sales Xceleration, which provides sales leadership consultants to small businesses and mid-sized corporations that are looking to drive revenue industries, with most showing 3.0%. In 2021, the salary survey shows a range of median year-over-year salary increases, from a high of 3.3% in life sciences to a low of 0% in services (non- financial). Even within industries, some jobs are experiencing salary rate increases that are much higher than others.

Settling On a Compensation Structure

The salary structure for sales professionals has long been a combination of a base salary plus commission. Companies that pay 100% commission or provide a draw against future sales growth or repair problems that have halted sales growth.

Thacker is a proponent of setting an on-track earnings (OTE) target — the total amount a salesperson should earn if they hit quota — and split that number 50-50 between base salary and commission. In a Sales Xceleration survey, 15% of companies paid straight commission, 25% set too high a base salary, and 21% had a base salary below 50%. (See chart below.)

Before setting a salary range for sales reps and determining how base salary and commission will be split, a company must first determine its target for gross sales profit and what percentage of sales revenue you’re willing to allocate to sales compensation, said Rene Zamora, president of Sales Manager Now, a provider of outsourced sales management to small businesses. In addition, factors affecting compensation include:

  • Local market benchmarks
  • Who is expected to generate the lion’s share of leads
  • What level of industry experience or knowledge is required to be successful sales process and the length of the average sales cycle
  • How many opportunities can be worked at one time
  • What percentage of post- sales support the salesperson is expected to provide

Aligning Salary with Desired Outcomes

Once you have a thorough understanding of compensation benchmarks in your industry, it’s imperative to structure your compensation package to suit the outcomes that you desire. Every company has different revenue goals, and those goals may shift as new products come online or new client needs emerge.

Thacker says many companies reach out for his company’s services when reps are not doing what company leaders want. Many of his clients do not have an individual in a sales leadership position. An owner or president wears multiple hats, including leading the sales team.

Often, sales problems exist because leadership lacks an understanding of how to align compensation with the most important company goals. Where one company may focus on retaining existing customers, another may seek explosive growth in new customers or increased sales of a new product or vertical. Objectives also may change within the same company from one year to the next. A business may want to drive more revenue from certain high-margin products during one period, but later need to focus on not being reliant on a handful of big customers. If company leaders don’t tweak the salary structure to align with those goals, they can’t realistically expect significant change from the sales team, Thacker said.

“It’s amazing how compensation plans stay the same from year to year even when owners or leaders want something to change in terms of revenue generation. A good salesperson will figure out how to exploit a compensation plan to make the most money possible. We want them to exploit it in a way that benefits them and the company at the same time.”
A recent Sales Xceleration survey showed that only 30% of companies make annual compensation plan updates.

Corporate Culture Is Part of Your Comp Plan You’ve read it a thousand times because that’s how important it is: Your corporate culture is a key recruitment and retention tool. Job candidates have multiple means of examining a prospective employer as much as they are being examined.

Candidates come to job interviews with challenging questions that help them assess how much a company is invested in its employees. If managers are not prepared to answer — thoroughly and honestly — they’ll have a tough time making the hire.

“While compensation is always going to be the No. 1 thing that matters to people, what comes second is enjoying what you’re doing and who you’re doing it with,” said Brooke Hamrick, head of growth at Pequity, provider of a compensa- tion software platform. “There is a lot of camaraderie that happens on a sales team that connects all the team members together. You can share the wins as well as the losses and learn together. I’ve seen some creative compensation plans in which, in addition to individual sales goals and rewards, the team aggregated goal is something that is rewarded if it’s reached.

This fosters cooperation and helping each other out.” Getting more creative about work perks is essential. Project44, a Chicago-based provider of freight-tracking software, launched a program in which employees can use a company-subsidized van — equipped with WiFi as well as a bed, toilet and shower — to combine work with family road trips. The company reports that when it opened up spots through the end of this year, dates were booked within five minutes.

Clearly Communicate the Comp Plan

Making sure sales reps understand how they are compensated and gaining their buy-in is possibly the most important part of making a pay package work, said Thacker. Simplicity and clarity are key.

Managers need to ask reps if they understand the compensation plan and have them sign a statement to that effect. That should eliminate difficult conversations six months down the road if they claim the compensation structure was misrepresented. Monitoring how reps spend their time should provide an indication whether they understand the comp plan. If their actions aren’t matching up with how they can maximize their income, review the comp plan to make sure they understand it.

“Keep in mind that sales compensation plan communication shouldn’t just take place once the plan is designed. Communi- cate with sales reps beforehand to understand their challenges and ideas,” Thacker stated in a blog post on common compensation plan mistakes. “If you know what matters to them and their families, you’ll be able to adapt your plan to enhance motivation. When complete, communicate your plan team-wide and with each individual rep. Answer questions and make adjustments as necessary — to the plan, to your communication process, or both.”

A competitive pay plan will always be a key factor in being able to land and keep high-performing salespeople. Older executives who are making the decisions about compensation packages must accept the shifts that are occurring. Someone who may have started decades ago in a commission-only job may struggle to understand why it could cause reputational risk and put their company at a disadvantage. The cost of high turnover can cripple a business.

“You need to speak to what matters to them. That goes back to the job design approach of marrying what excites and inspires them with the business needs,” said Rikka Brandon, founder and CEO of Recruit Retain Rock. An experienced recruiter herself, Brandon started her own business during the pandemic that helps companies learn how to recruit top talent on their own.

“Smart companies and smart leaders are going to get ahead by really learning how to connect with what truly motivates a person and figuring out how to build that into their reward system,” she said. “If you have engagement, challenge and reward — if people are interested in the work they’re doing and in helping the customers, and they feel challenged — you have a 95% chance of keeping them.”

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Paul Nolan
Paul Nolanhttps://salesandmarketing.com
Paul Nolan is the editor of Sales & Marketing Management magazine.

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