Should salespeople’s pay take an incentive pay “hit” because of economic dislocation by COVID-19?
Short Answer: Sales leaders should determine how to “protect” the earnings of sales personnel resulting from any shortfall in sales revenue due to COVID-19. In other words, yes, sales leadership should protect sales compensation target earnings.
Is Sales Compensation A Variable Cost?
The immediate logic is to assume that sales compensation costs are variable. With this assumption, sales leaders would not adjust quotas or provide earnings’ guarantees. However, sales compensation costs are not variable to the company. Yes, they are variable to the person, but not to the company. For producers (real estate, traders, brokers, manufacturer reps, independent financial advisors), payouts are fully variable. However, sales compensation costs for sales representatives, who have target pay and a sales quota, are not variable to the company. Why?
Sales representatives are “purchased labor.” Sales leaders assign a target pay amount split into two components: base pay and target incentive. Sales representatives perform against a goal to achieve target earnings. Some will exceed the goal and earn above-target earnings, some will not. In balance, the average payouts should equal the summation of target earnings. The summation of target earnings is the “budget” for the sales representative population. Meanwhile, producers get a percent of the business—some/all will earn plenty; some/all might earn very little. The cost to the company is fully variable.
Now What?
The objective is to keep sales personnel “whole” or “partially whole” so they do not suffer from a financial shortfall caused by factors outside of their control. How?
Sales management has many tools available to protect target earnings. However, select a method carefully. Unintended consequences can arise if management selects the wrong method.
Avoid techniques that encourage sellers to take a “sellers’ holiday.” Immediately offering a guarantee or quota adjustment to assuage sellers’ fears might cause some sellers to throttle sales efforts…even delay pending deals.
It’s best to acknowledge the market conditions. “We understand the sales challenges you are facing. We want to ensure earnings opportunities during this uncertain economic period. Keep up your selling efforts; find ways to meet customer needs. Secure orders. Over the next several selling periods, we will review our selling results to determine if it warrants any pay or quota modifications.”
Earnings Protection Choices
Consider one or two of these suggestions to protect sellers’ earnings:
- Guarantee. A simple solution is to provide all sellers a guaranteed minimum payout level (e.g., 80%) even if the seller’s performance does not exceed the guarantee amount.
- Reduce Quota. Some companies may want to make firm-wide quota reductions to all sellers based on revised business plan expectations (if able to set one).
- Bridge Performance. Companies with annual quotas can apply bridge performance expectations for a period to calculate overall quota achievement. Bridge performance can be set at 100%, lower (e.g., 80%), or based on the seller’s current run-rate (e.g., 95% for Seller A and 105% for Seller B).
- Index Performance. Another method is to shift the median performer to 100%, but keep the performance distribution standard deviation the same (similar to stack ranking).
- Team Rewards. Some companies may choose team measures to communicate collective circumstances that “we are all in this together” and acknowledge account/vertical/geographical unpredictability.
- Provide SPIFs and Contests. Companies can reallocate sales compensation cost savings to fund SPIFs and contests that reward sellers for desired near-term behaviors, such as funnel development activities, competitive wins, market share growth, adoption and/or customer satisfaction activities.
- Terminate Plan. If market dislocation is severe, uneven and disparate, leaders can terminate the existing plan and calculate final payouts based on year-to-date performance. New plan options include developing a new sales compensation plan and quota, paying 100% of target incentive, or possibly moving all sellers to a corporate plan.
What about dire conditions? When a company’s performance suffers threatening sales erosion, sales personnel will participate in a like manner with all employees regarding pay reductions, layoffs and terminations.
Hoping COVID-19 has only a temporary impact on your company’s fortunes. You will need a robust and positive sales team when economic opportunities flourish again. Protect your sellers’ target incentive.
Reach out to an Alexander Group practitioner for help reviewing your organization’s situation.
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About the Author
David Cichelli contributes his revenue growth knowledge and experience to a wide array of sales organizations. His clients include leading companies in technology, telecommunications, wholesale/distribution, financial services and healthcare. David helps clients redefine and deploy go-to-customer solutions to ensure optimal revenue performance. By applying the Alexander Group’s Revenue Growth Model™, he helps companies achieve their revenue objectives through the coordination of marketing, sales and service resources. These efforts include revenue planning, customer engagement design, sales force configuration, and program design and management. He is the Alexander Group’s sales compensation practice leader.
