How to Set Sales Pay Levels in 5 Easy Steps
Having worked in consulting for a number of years, the question I get asked most frequently is “how is our pay compared to our direct competitors and to the market?” This is a legitimate question for almost every company because everyone is seeking to recruit the best sales people as well as retain and engage the current sales force. It is also an important question because one of the highest costs a company incurs is its sales compensation expense.
In the past, I worked for a global industrial manufacturing company whose annual revenue was approximately $14B. Target incentive for employees on a sales or local incentive (excluding employees on the annual management incentive plan) was around $222.7M or 1.6 percent of revenue. Add base salaries amounts to the target incentives and the percentage to revenue jumps to 4.8 percent. That is some serious cash!
When it comes to setting pay levels, it is both an art and a science. Let’s be honest, a lot of sales organizations base pay levels on anecdotal information obtained from employees they have recruited from the competitor or based on the sales manager’s gut because of their industry experience. Welcome to the art side. Now let’s introduce you to the science of setting pay levels.
Our Recommendation: Contact your company’s compensation team. They will be a great partner throughout this process, and they may already have the data you need to establish pay levels for the sales force. Here are five basic steps to follow when setting pay levels:
Step 1: Define Job Responsibilities
Each sales role has different responsibilities, and your compensation plan(s) should reflect this. Define the top 3-5 job responsibilities of each sales role. It’s important to define the responsibilities based on the job description and objectives, not the person in the job. This will allow you to correctly match your sales roles to the roles in the salary survey.
Step 2: Conduct a Market Benchmarking Exercise
Find a reliable salary survey resource(s). Salary surveys are tools that help determine how employees in different roles and industries are paid. Compensation data is collected from employers across functions, industries and geographies. This data will help you benchmark your organization against competitors in your industry, design a competitive compensation strategy, and align goals to market.
When looking for a salary survey, find one that represents your organization’s industry, peer group, and company size. Your comparisons should be with companies that contain sales roles with responsibilities similar to your team and have participants from the geographic regions where your company does business.
For example, Xactly’s Insights is the first big data platform to provide users with live incentive compensation insights across a range of industries. Using aggregated data, Insights provides detailed information on how different industries compensate different sales roles.
Other salary surveys such as Radford specialize in the Hi-Tech and Life Sciences industries. Willis Towers Watson and Mercer provide surveys that have a significant global reach. You may also find that professional associations in your industry will conduct industry-specific surveys that can purchased.
Ultimately, you will need to match your sales roles with the roles in the survey and use that data to benchmark your compensation plan. Read the sales role descriptions in each survey and determine which most matches your jobs as closely as possible. You’ll rarely find descriptions that match your sales roles exactly, but aim for an 80 percent match.
At a minimum get the target total compensation (TTC), base salary, and target incentive percentage for the 25th, 50th and 75th percentiles. There will be other data that will be beneficial to you later. In my experience, I’ve found it can be helpful to organize data in a spreadsheet before designing your plan.
Step 3: Create Groups of Jobs With Similar Target Total Compensation
Assuming that your organization does not already have salary grades or bands, you will want to group jobs that have similar pay data (you may also consider this when designing commission structures). We recommend using the 50th percentile target total compensation to get your initial data point and to group the jobs. Jobs with similar TTCs will also be in same group.
Step 4 – Develop a Salary Range for Each Group
A salary range is a range of pay established by employers to pay employees for performing a certain job. Ranges allow salespeople with the same role but different experience levels to remain in the same group, but be paid at different levels.
When building a range, start with the average percentile of all the jobs in the group (deciding which percentile is up to the organization). This number will become your midpoint. You will then calculate your minimum and maximum pay levels. Typically, the ranges have a spread between 30-40 percent.
Assuming a 30 percent spread, the minimum is calculated by multiplying the midpoint by .85 percent, and the maximum is calculated by multiplying the midpoint by 1.15 percent. The results below are based on a 50th percentile midpoint with a 30 percent range.
NOTE: The group maximums may overlap with the next group. This is preferred because it allows for movement within the range and also allows for flexibility when offering promotions.
Step 5: Update the Compensation Structure Periodically
Salaries change with the cost of living so it’s important to periodically review the compensation structure for relevancy. Salary surveys are conducted on an annual basis, but it is unlikely that you will need to purchase a survey each year. However, it may be necessary to account for cost of living increases on an annual basis.
In closing, creating pay levels is the marriage of an art and science. Use salary survey data as a benchmarking point to assist creating a structure. However, it is also important to remember to be flexible because a company’s culture towards total rewards can be a huge driver in the decision making process.
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