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Market Pricing Sales Compensation: A Combination of Science and Art
Dennis Spahr, Vice President – Sales Effectiveness, Sibson Consulting

Market pricing sales compensation is a combination of art and (inexact) science. Or, as a former colleague once noted, it’s reminiscent of “Goldilocks and the Three Bears.”

  • “Our reps are paid below market.”
  • “Our reps are paid above market.”
  • “Our reps are paid just right.”

Even if you communicate the third message, there are often disagreements about how the data was collected and who the market peers are. Nevertheless, market pricing sales compensation is something that can help sales organizations make good hiring and pay decisions. Companies that are most successful at market pricing understand their sales organization and its pay philosophies, set realistic expectations, follow a consistent market pricing process and are perceptive enough to bring a little art to the science.

Understand Your Sales Organization
Successful market pricing begins with a clear understanding of your sales organization and its pay philosophies. If you don’t already know the answers to these questions, you need to work with your sales leadership to get them:

  • What is our labor market?
    • Are we recruiting only from direct competitors in our industry (and if so, who are those competitors), or do we recruit across multiple industries?
  • What is our pay philosophy?
    • Do we target 50th percentile for salary and total cash levels or 50th percentile for salary and 75th percentile for total cash? (A word of advice: Do not allow sales leadership to say “90th percentile” unless the CEO, CFO and CHRO have set 90th percentile performance expectations for the sales organization!)
    • Do we target certain “key” roles at a different level vs. market?
  • Do we clearly define the various sales and sales management roles?
    • What level reports to whom?
    • What is the difference between an Account Manager II and an Account Specialist III?

Set Realistic Expectations
Gathering and presenting competitive sales compensation data can be enlightening, but because there are limitations to market pay data, it is important to set realistic expectations. Understand (and communicate) what market pay data can and cannot do for your organization.

Competitive market sales pay data can provide:

  • A snapshot of past pay levels for a benchmark role
  • Pay levels for benchmark roles at similar companies, not necessarily for your specific competitors
  • Relative direction in setting pay levels
  • A reality check for you and your sales leaders.

Competitive market sales pay data does not consider:

  • Your organization’s specific market potential and growth strategies
  • Your organization’s specific performance to goals
  • Other rewards provided by your organization (benefits, work-life balance, culture)
  • Unique nuances of the sales roles in your organization.

Follow a Consistent Process
The science part of market pricing requires you to follow a consistent process when you gather and ultimately present market data. The illustration below presents a process that will result in a clear understanding of your sales organization, let you set realistic expectations and ultimately provide the best possible match of your organization’s pay levels versus market pay levels.

Clearly Define Job Roles within Your Sales Organization
  • Gather job descriptions for each internal sales role.
  • Interview sales managers and leaders to understand nuances of sales roles.
  • Define reporting relationships of sales roles and span of control for sales manager positions.
Match Internal Roles to "Market Benchmark" Roles
  • Identify potential market surveys containing benchmark sales roles.
  • Select benchmark roles similar to internal sales roles for review.
  • Present benchmark roles to sales leadership (without pay data).
  • Agree on benchmark roles (adjust for premiums/discounts accordingly.)

Gather Market Pay Data for Job Matches

  • Collect market pay data for agreed upon market benchmark roles.
  • Use at least three survey sources for each job match.
  • Discuss the need for industry and geographic cuts with sales leaders.
  • Update market data appropriately to current date (e.g., if data is from last year, consider updating it by X% to account for pay increases).
Match Incumbent Data to Market Pay Levels
  • Compare incumbent pay levels to market pay levels (e.g., 25th, 50th, 75th, 90th percentiles)
  • Determine difference to "market" (your organization may decide to target the 50th percentile for salary and 75th percentile for total cash).
Lather, Rinse, Repeat
  • Review incumbent data vs. market levels with sales leadership, HR and other key stakeholders.
  • Revise accordingly (e.g., check for additional market pay surveys or industry cuts).

Source: Sibson Consulting

Bring a Little Art to the Process
Armed with a good understanding of your sales organization, realistic expectations and a consistent process, you can rest assured that the market data you present to your organization is sound. However, when it comes to actually setting compensation levels, you will want to use your artistic side. Market pricing is only one piece of the puzzle, so you need to consider additional factors such as:

Internal knowledge of competitor sales compensation plans and levels: If many in your organization previously worked for your biggest competitor, use their knowledge of the competitor’s pay plans and levels.

Interview data and recruiter information: What are the pay levels of the candidates you are recruiting? What do recruiters say the market pay levels are?

Supply of talent: While current economic conditions may favor employers, there will still be times when your sales organization needs new talent. Remember the old economic law, “if supply is tight and demand is high, prices will go up.”

 

In Summary
There aren’t many professionals who like to conduct market pricing for sales roles. The process can be tedious and getting agreement on your organization’s sales roles relative to “market” roles is like getting a stimulus bill through Congress. Moreover, when you present market data, you will be questioned more than a presidential cabinet nominee. Nevertheless, by understanding your sales organization and its pay philosophies, setting realistic expectations, following a consistent market pricing process and bringing some art to the process, you can give your sales and HR leaders confidence that your sales organization really does pay competitively.

Dennis Spahr is a Vice President with Sibson Consulting, a division of The Segal Company in Chicago. Dennis specializes in sales force effectiveness. He can be reached at 312-456-7905 or at dspahr@sibson.com.

Contents © 2009 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.


Reader Comments
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Mon May 2, 2011 2:40 PM (edited 5/2/2011) Report Abuse
Michael Juarez
Sales Manager
Comments: 1
 

My organization has recently been evaluating the option of increasing the non-cash incentive in our comp plan.  Does anyone have anything to add regarding this change?

-Michael

Sales Compensation

 
Fri October 30, 2009 9:47 AMReport Abuse
Alan Bolyard
Fin Anal Proj Mgr & Mgr NA Sales Ops
Member Since: 2/1/2001
Comments: 5
 

Good article that "hits-the-nail"..... The keys are: Pay mix should be considered and carefully compared to market data -- which is not always easy. Be wise about positioning yourself to the market (i.e. 50th percentile). Establish "advisory council" of sales staff to ensure their voices are considered -- if there's an issue, they'll let you know early-on. And finally, be sure to have a clear definition of roles and their progressions (career path).

 
Mon July 27, 2009 8:17 PMReport Abuse
Michael Carbone
Manager Executive Compensation
Member Since: 5/1/1999
Comments: 3
 

A great article that captures several salient points regarding market pricing for sales roles.  One critical area is the organization's understanding and acceptance of TTC alignment to the market.  Frequently, alarms will ring and bells will sound if a sales rep is leaving for "more money".  This may be in the form of base, incentive or TTC.   In order to compare "apples to apples", TTC should be the comparable baseline.  Unfortunately, organizations (and individuals) have a tendancy to focus more on one component (e.g. base) without understanding (or acknowledging) the comparable pay mix.  The ability to educate the business in pay mix differences (50/50 vs 60/40, etc) along with a clear understanding of the organization's pay philosopy can help move the organization to a position of greater understanding, if not acceptance.

 

 
Thu May 14, 2009 1:44 PMReport Abuse
Lisa Bazzoni
Compensation Consultant
Member Since: 8/13/1996
Comments: 1
 
Very good article overall. My experience is that you cannot put too much emphasis in bringing a "comfort level" around step 4 - Match incumbent data to Market Pay levels. Sales management can get easily wrapped around where their high performers are or should be paid in the market. Sometimes these managers have to be "talked down" from the soap box they've climbed before they'll listen to the story or art versus science, and that market pricing should be and can be an iterative process.