Sales Compensation Principle #2 (of 10): Target Total CompensationBy: Rachel Parrinello Sales Compensation, Sales Compensation Program Management
Best-in-class companies leverage the following Target Total Compensation guidelines:
- Define a clear and consistent target market pay philosophy
- Set Target Total Compensation at the appropriate percentile to attract and retain the right talent required by the sales organization to execute its strategy
- Benchmark to the right roles based upon job content; use internal equity when no market benchmark exists
- Benchmark to select group of companies based upon market competitors, talent competition and similar sales motions
Most companies leverage the following target pay level practices.
Pay Philosophy. The most common practice is to set the pay philosophy at the 50th percentile of a firm’s target market. Some companies willing to pay more for high caliber talent will set their pay levels at 60th or 75th percentile of their market.
Market Pay Surveys. Most companies purchase 1-3 surveys to benchmark and set pay levels for their jobs. Contact us for a copy of our “Reference Guide to Sales Compensation Surveys” for detailed information about all available sales compensation surveys. If using multiple surveys, do not weight or average results as it will most likely double count some participating company’s data.
Target Market. To ensure ample n-counts within all survey jobs/job levels by country, companies should define 20-30 companies within each market pay survey as their target market. This list should include companies where they compete for both product and talent. When needed, expand the definition to include companies with similar sales motions.
TTC Pay Level Setting Methodology. The best practice is to set the Target Total Compensation (TTC) level and then apply appropriate Pay Mix to calculate Base Salary and Target Incentive (TI). See first graphic in Figure 1.
Pay Mix Methodology. A “fixed pay mix” methodology places all incumbents on the same pay mix regardless of their TTC level. A “fixed target incentive” methodology provides all incumbents with the same target incentive and different base salaries/pay mixes. Use fixed pay mixes when pay varies widely within each job level and fixed target incentives when variations are narrow.
TTC Pay Ranges. Determine the appropriate pay range above and below the pay level midpoint based on degree of job content variance. Minimize pay gaps and pay overlap between job levels. Most common practice is to use a pay range between 10-20 percent; however, some companies will decrease the range for higher job/pay levels to reduce the pay overlap between levels. The second graphic in Figure 1 shows a 20 percent range above and below the midpoint.
Geographic Pay Differentials. Some companies vary pay levels by geographic locations to accommodate cost of labor/living differences. Set differentials for lower paying jobs where geographic location has significant impact on pay levels. Set national pay levels (no differentials) for higher paying jobs where job mobility is more common and the pay range can accommodate geographic location differences.
Compa-Ratio. To benchmark your current practices, calculate the compa-ratio by dividing each employee’s pay level by the pay structure mid-point. Healthy compa-ratios vary depending on the range—it should be between .8 and 1.2 for a 20 percent pay range spread. See third graphic in Figure 1.
Market data can be misleading due to how companies map and submit their data for each job level. It is common for n-counts to vary dramatically by levels, making data for some levels suspect. And, sometimes higher job levels will have lower pay levels. Therefore, just looking at one data point (e.g., the 50th percentile) for specific job levels can be misleading. Best practice is to chart multiple percentiles for all job levels. This chart graphically displays overall market practices to inform final pay level decisions. For example in Figure 2, the company had only three job levels and paid at the 50th. However, analyzing how all five job levels paid as well as multiple percentiles (25th, 50th and the 75th) enabled them to set a structure that accommodated most of the market.
If you need help setting your Target Total Compensation levels or any other sales compensation plan design question, please contact us at the Alexander Group. We offer a range of solutions from half-day workshops, to principle framework development, to full plan design engagements.
Learn more about AGI’s Sales Compensation practice.
This is the second in a ten-part series examining the components of sales compensation guidelines. Read Part 1 of this series.