A Guidebook for Global Sales Compensation Pay Mix
How do global companies manage their sales compensation pay mixes for the same sales job when located in different countries?
Does the pay mix vary by country allowing local leaders to determine the pay mix for their sales job within their assigned country? Or, are the pay mixes globally consistent regardless of where the sales job is located? Additionally, what are the advantages or disadvantages of varying the pay mixes versus making them globally consistent? More important, what is the best-in-class methodology for setting and managing pay mixes globally?
Pay Mix Primer
Before examining global versus local practices, here is a quick primer on sales compensation pay mix and why sales compensation plans generally use a pay mix methodology rather than a percent of base salary approach most often used in management and gainsharing incentive plans. Pay mix is the ratio of base salary to the target total compensation (TTC) and target incentive to the TTC. In other words, 60/40 means 60% of TTC is base salary and 40% of TTC is the target incentive. For example, if a job has a TTC of $100,000 with a 60/40 pay mix, then the base salary would be $60,000 (60% x $100,000) and the target incentive would be $40,000 (40% x $100,000). (See Figure 1.)
Sales compensation pays for persuasion–persuading the customer to buy something from the company. The market generally uses a pay mix methodology (as opposed to a percent of base salary approach found in management programs) to reinforce the at-risk status of the target incentive until goal achievement. In other words, sales representatives are unable to achieve their TTC until they hit their goal (usually in the form of a sales quota).
For example, this is a typical communication to sales representatives: “Congratulations on your new sales job. We are committed to paying you our market competitive target total compensation package of $100,000. Your base salary is $60,000 and will be paid biweekly. Your incentive compensation will vary based on your performance against your sales quota and be paid monthly. If you achieve your target sales quota, you will earn your full $40,000 target incentive. If you miss your target sales quota, you will earn less than your target incentive, consistent with your performance. If you exceed your target sales quota, you are eligible to receive accelerated payouts to reward you for your over-quota achievement.”
Management and gainsharing incentive programs provide a base salary with a bonus opportunity expressed as a percent of base salary. For example, a management incentive program may pay a leader a $100,000 base salary with a 25% base salary bonus opportunity. The bonus opportunity is equivalent to $25,000 ($100,000 x 25%). Sales compensation programs generally do not use this methodology because it does not explicitly communicate the at-risk nature of the incentive.
Pay Mix Management Practices
Companies will vary pay mixes for each job based on the job’s level of persuasion. For example, a direct sales representative job responsible for prospecting, qualifying and closing deals may have a 60/40 pay mix, while an overlay technical specialist providing technical expertise during the sales process may have an S0/ 20 pay mix.
Similarly, most companies vary pay mix for the same job across countries. Results of the Sales Compensation Trends Survey showed that 64% of the global sales organization participants vary pay mix by country and 36% use globally consistent pay mixes.
Global pay mix principles and rationale vary from company to company. Companies that allow pay mix to vary by country generally have the following pay mix principle: “Pay mix is based on the role’s degree of persuasion/influence in the sales process and aligned to local market benchmarks to recruit and retain top talent.” These companies typically cite one or all of the following reasons to support their practice. First, they may wish to accommodate local market practices regarding at-risk pay tolerance to ensure they can recruit and retain the right talent for that marketplace. Second, the job content and degree of persuasion may vary based on selling requirements in the local market. And third, the company might allow pay mix variance to match the local performance management narrative.
Companies that use globally consistent pay mixes generally use the following pay mix principle: “Pay mix is based on uniform job design and is globally consistent.” These companies typically cite one or both of the following reasons to support their practice. First, they prefer to drive one global job and associated compensation design. And, second, a consistent worldwide approach to pay mix is easier to communicate and administer.
Most companies that vary pay mix by country use two practices:
- Local discretion. Provide a pay mix range and let the local country managers determine the right pay mix for their country. Challenge: Management discretion might allow a local manager’s personal bias to be the basis of pay mix decisions and, thus, may change when leadership changes.
- Prescribed local pay mixes. A corporate function selects pay mixes for eac h role in each country. Challenge: This effort requires extensive corporate oversight, which is complex to manage, track and communicate.
Globally consistent pay mix practices have their issues, too. Local management may have a difficult time recruiting and retaining local talent if base salaries are too low or, conversely, when the target incentive is too low–it becomes too difficult to earn upside rewards. One way to solve these issues is by creating a pre-defined pay mix structure.
Develop a Pre-Defined Pay Mix Structure
A pre-defined pay mix structure provides corporate direction while allowing local adjustments. Here are the steps to create a pre-defined pay mix structure.
STEP 1 Gather Market Data.
There are many sources of international market pay mix data. Similar to a pay level benchmarking exercise, companies should select a data source that includes a data cut for their industry and/or companies where they compete for labor and product. Many companies purchase a custom cut of the market data, which includes a specific set of target companies to improve their data’s relevance. Large companies source multiple data sources to improve the accuracy of their data. After selecting the data source, companies select the market job matches and countries pertinent to them. Then, they pull the pay mix data for those jobs/countries by examining actual incentive payouts compared with base salaries.
STEP 2 Group Jobs by Degree of Persuasion.
Group jobs by level of persuasion and influence on the purchasing decision. Companies use the market data to guide their grouping; however, they should recognize the unique attributes of their own go-to-market model and sales responsibilities. Following are example job groups:
- Job group 1: This group includes jobs with the highest level of persuasion, such as the named account manager.
- Job group 2: This group includes jobs with medium levels of individual persuasion, such as the overlay product specialist (who works across a region of named account managers) and global account manager (who has to rely on a team of sales and nonsales resources to complete a sale).
- Job group 3: This group includes jobs with lower levels of persuasion, such as the channel manager (who relies on partners to close deals) and business development role (strategic role focused on evangelizing the solution that leads to specific larger opportunities, but not responsible for closing the deal).
STEP 3 Group Countries by Level of Risk Tolerance.
Gather the pay mix data by country for the primary, most populated sales role. Next, sort the data by market pay mix and assign each country to a group. Figure 2 includes the survey results for U.S. named account manager roles with 40/60-50/50 in the Sales Compensation Trends Survey. Note: Although the data suggest six pay mixes to be used by nine countries, the goal is to consolidate the data into a simplified structure that is directionally appropriate for each included country.
STEP 4 Set pay mix for each job and country group based on individual influence and market practices.
Create a matrix that includes each job persuasion group and each country risk tolerance group. Then, leveraging the market data, fill in the boxes. Because Figure 3 uses the market data for the named account manager in Job Group 1 to define the country risk tolerance groupings, the rounded pay mixes for each of those country groups are populated into the first row. Leveraging market data for the roles included in job persuasion groups 2 and 3, the pay mixes for these two rows are populated (data in chart is an example).
Simplicity vs. Complexity
Some practitioners err on the side of being too simple and, therefore, may design a limited pay mix structure. Other practitioners err on the side of being too exact and, therefore, may design a complicated pay mix structure. The key is to ensure the structure accommodates local market needs but is simple and easy to communicate, explain, administer and govern.
Pay Mix Transition Strategies
After the pre-defined pay mix structure is set, companies should complete a gap analysis by comparing their current participants’ pay mixes with the new pre-defined pay mixes. Next, determine what the appropriate transition strategy is to align their current participants to the new structure. When considering the best transition strategy, companies should consider the competitiveness of the participants’ pay levels as well as their ability to articulate a compelling business case for change. Lastly, do not forget to comply with country regulations that limit base pay changes. The following lists provide the most common transition strategies depending on the type of change:
Migrate to more pay-at-risk (e.g., 80/20 to 60/40)
- Cold cut. Move base salary to target incentive.
- Cold cut with pay change. Move base salary to target incentive; however, increase overall TTC to soften the transition (generally used when TTC levels are be low market).
- Recoverable draw. Provide a nonguaranteed draw equivalent to the difference between the new and the old base salary for a specified period (e.g., $5,000 recoverable draw per month for six months).
- One-time payout. Provide a one-time payout equivalent to the difference between the new and old base salary.
- Migrate over time. Migrate individuals to new pay mix over time (e.g., convert 5% of base salary to target incentive each year for four years).
- Migrate with merit increase. Add all future merit increase to the base salary until individual reaches the new pay mix.
- Grandfather. Grandfather the individual at the old pay mix.
Migrate to less pay-at-risk (e.g., 60/40 to 80/20)
- Cold cut. Move target incentive to base salary.
- Cold cut with pay change. Move target incentive to base salary; however, increase overall TTC to soften the transition (generally used when TTC levels are below market).
- Recoverable draw. Provide a nonguaranteed draw equivalent to the difference between the new and old target incentive for a specified period (e.g., $5,000 per month for six months).
- One-time payout. Provide a one-time payout equivalent to the difference between the new and old target incentive.
- Migrate over time. Migrate individuals to new pay mix over time (e.g., convert 5% of target incentive to base salary each year for four years).
- Migrate with merit increase. Add all future merit increase to the target incentive until individual reaches the new pay mix.
- Grandfather. Grandfather the individual at the old pay mix.
When it comes to sales compensation design, even for an aspect as straightforward as pay mix, there is no shortage of opinions. Letting each leader decide what’s appropriate for their teams will inevitably lead to a wide range in pay mixes and a host of potential downstream problems. Applying a one-size-fits-all global structure may cause recruitment and retention issues. There are several benefits to confirming with leadership the company’s pay mix philosophy and developing a pre-defined pay mix structure, including:
- Pay mixes that align to the role’s degree of persuasion
- Market competitive pay mixes that allow you to attract and retain the right level of talent in local markets
- Principle-driven solution as opposed to leadership whims
- Programs that are easy to communicate, administer and govern.
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