How Much Commission Should You Pay to Stay Competitive?
Competitive compensation means striking the right balance of base and variable pay for your sales team, to the point where the amount offered to individual roles is in line with what others employed in similar capacities receive. How much commission you should offer typically depends on a number of factors, such as sales role, length of the sales cycle, and even the location of your sales rep. Figuring it out can be a daunting task.
However, the benefits of doing it right are well worth the effort. Research shows that leveraging the right pay mix drives higher sales performance. According to the 2015 CSO Insights Sales Compensation & Performance Management Study, an effective sales compensation plan can increase the number of people beating quota, improve forecasting accuracy, and lower turnover.
How do you know if your compensation is competitive? With over 11 years of empirical data on compensation plans, this is one reason why more and more companies are choosing Xactly. By leveraging Xactly Insights™, customers are empowered to drive a highly competitive compensation plan for their business.
To gain more understanding about sales commission best practices – and how strategies are evolving – I turned to Erik Charles, Xactly’s vice president of product marketing. Erik has spent the majority of his professional life focused on sales compensation and has a wealth of knowledge on the topic.
Four Tips for Offering Competitive Compensation
#1. You Need the Right Balance Between Variable and Base Pay
Getting the right balance between variable and base pay is still the biggest challenge with any sales commission strategy.
Variable compensation represents pay that isn’t guaranteed to a sales person. You want to use variable compensation to keep reps hungry enough to aggressively drive the sales machine. However, you also need to guarantee enough base compensation to reps so that they can pay the rent. And, if your company has a longer sales cycles, that needs to be factored into the equation as well – in those instances, you will want a higher base pay.
Figuring out the right percentage of variable versus base pay can be delicate. If you don’t offer a competitive variable pay, you risk losing top sales talent to other organizations. Commissions represent how most sales people make the bulk of their livelihood. They need to be given enough opportunity to do so.
Additionally, the right amount of commission motivates sales rep behavior. Variable pay is a great incentive to get new hires up to speed more quickly. Conversely, it’s also a way of identifying the underperformers faster.
#2. Regularly Review Your Pay Mix Levels
The right pay mix isn’t static. Yet, many companies only review their compensation plans every three years (or even longer). In today’s competitive sales environment, organizations must evaluate pay levels more frequently in order to understand their plan’s performance. Erik recommends that companies review plans on an annual basis.
Xactly, for example, offers strategic services that can provide a ‘health check’ of a company’s sales compensation. Support can include on site workshops to assess whether your plan is functioning as desired, as well as plan design assistance.
This type of service can be beneficial to make sure you’re on target with your compensation plan. For example, do you know how many people you are paying per deal? If you’re paying more people than that per order, you should know that.
Knowledge is essential to determine whether the plan that you’re using is actually the right compensation plan for your business.
#3. Compare Your Plan Against Peers
If you’re losing employees, having insight into your competitors’ compensation plans can give you greater understanding as to why your people are leaving. What are they being offered at the new company that you aren’t giving them? Are you being outsold because they have more pay at risk, and therefore more upside to a great sales rep, than you do?
If you’re not being outsold because of product reasons or brand awareness, your commission plan might be playing a role. If you have a high base salary with less pay at risk, you’re not going to attract the hungriest sales reps.
With Xactly Insights, you can quickly access comparative data to check your pay mix versus peers.
This gives you the ability to quickly compare your plan against similar-sized companies, companies within your industry, or companies in the same location. If, for example, their 75th percentile reps are making more than yours, your peers are valuing top performers more than you.
Leveraging Xactly Insights, National Instruments gained benchmarking capabilities that allowed them to quickly analyze relevant industry and peer data to improve their incentive compensation plan. On average, Xactly customers achieve up to 5 percent higher quota attainment by optimizing their incentive compensation plans.
With insight into how other companies are leveraging compensation plans, you can improve your own plan for maximum value. You can see best practices with compensation plans and what strategies are proven to be most effective.
#4. Pay-at-Risk is Increasing
Across the board, companies are putting more dollars toward variable compensation. Compared with several years ago, the average pay at risk has increased an average of nearly 10 percent. This is a significant increase in performance-based pay.
In 2012, Xactly’s data shows that the average pay-at-risk for sales people was 33 percent. In 2016, that number had climbed to 43%.
Erik believes that this trend stems partially from the fact that companies are still coming out of the recession. Rather than increasing total salary, companies are reacting by keeping salaries flat and putting more pay at risk. This prevents a company from sinking too much in base pay, while simultaneously keeping employees driven to perform.
Changing pay mix can be difficult – nobody wants to reduce someone’s base salary in exchange for more commission opportunity. Instead, as a company’s outlook shifts and more funds become available to the sales team – putting more money behind commissions allows the total target earnings to be competitive, while also ensuring that the spend will only go towards those sales team members who are producing.
Combined with accelerators for above quota performance, a higher percentage of pay at risk can be a very attractive incentive plan component for the members of the team who can close business.
In general, there will be variation between commission and base pay depending on the sales role. Account executives (AEs) will have a higher percentage of pay-at-risk to sufficiently incent them to pursue new business. On the other hand, a sales development representative (SDR) will have a less aggressive pay mix because they have less influence than an AE over the final result.
Additionally, you need to pay attention to the number of payees on a deal. Many companies pay multiple people for a single deal. Xactly has found it’s preferable to limit payees to 5 or less per deal to drive the right behaviors, and ensure the commissions are impactful.
Because variable pay impacts business performance, organizations need to be sure that they are giving enough attention to their compensation plans to stay competitive. If you’re not paying a high enough percentage of commission, you could be decreasing employee motivation – or losing your best players. Replacing them represents a huge business cost.
To learn how Xactly helps companies evaluate the effectiveness of and optimize compensation plans for higher performance, contact us now.
Designing Sales Compensation Plans
With careful consideration and strategic design, you can use incentive compensation to inspire your teams and empower them to perform above and beyond the competition.