How to Make the Base Variable Mix of Your Sales Compensation Plan Rock
If you are wondering whether or not your sales compensation plans have the right base-variable mix, this article will provide you with answers. Recently, I wrote about the value of role clarity in sales incentive plans. It’s just as important to know what you are paying for as how you pay for it. Now that we’ve learned how to identify the what, let’s examine the how.
The matrix below outlines three different sales roles, the best practice base-variable mix and the recommended performance measures for the variable component. Before diving into the recommendations, let’s first define the components of the matrix.
Definitions:
Direct Seller –a traditional sales representative. They are the single point of contact throughout the sale and are responsible for managing the end-to-end aspects of your sales process.
Channel Seller –an indirect seller. He or she works with your third party channel organizations and acts as a subject matter expert (SME) to help influence the sale. Often, he or she isn’t closing the deal, but is an integral part of converting opportunities to orders.
Influence Seller –typically sells to the end user of the product or service, but often does not interact with the ultimate decision maker. Their role is to get the user buyer excited about the product so they tell the decision maker (i.e. purchasing, contracts, executives) to negotiate an order.
Base-Variable Mix –the percent of base and variable pay out of the total. For instance, a direct rep that has a target compensation of $100K would have $60K of base pay and $40K in target variable pay available.
Peak Performance Multiple – the multiple paid on variable pay for top performers. Using the prior example of $40K in variable, the top direct rep should have the ability to make a 3.5-4x, or $140-160K in variable pay.
Performance Measures – components that make up the variable portion of the sales incentive plan. The influencer role should be paid partly on sales results (i.e. revenue) and partly on management by objectives (MBOs).
Recommendations
- The variable pay should match the rep’s value in the sale. As their influence on closing the sale increases, so should the variable incentive. For example, the direct seller has 40% of his or her plan leveraged while the influencer only has 20%.
- Peak performance multiples should also diminish as influence increases. The direct sales rep should be able to make 3.5-4 times the variable target, while the influencer should only make about 2.5 times. This is directly proportional to the rep’s ability to close the sale.
- Performance measures for direct reps should be primarily directed towards production measures like revenue, gross margin and cross/up sells. As you move towards the influencer rep, the focus on revenue exists, but so do MBOs like number of new accounts opened, customer retention and number of demos.
Call to Action
- Identify the role your sales rep’s play in your organization (direct, channel, influencer)
- Compare your current base-variable mix with the enclosed matrix (60/40, 75/25, etc.)
- Determine what multiple your peak performer(s) made on their variable last year (1x, 2x, 4x)
- Assess if the performance measures you pay for are aligned (revenue, margin, retention)
Now that you have assessed your sales compensation plans, ask yourself the burning question: Do I have a problem?
If you enjoyed this post, get free updates by subscribing by Email or RSS.
Sign up for our next webinar: Each month a sales consultant from our firm presents a best practice taken from one of our clients. You can sign up for the next one here:
