Pay Compression – An Unconventional Approach for Sales

Pay Compression – an Unconventional Approach for Sales

The pandemic of 2020 continues to create downstream impacts to companies both large and small, and arguably will do so for many years to come. The challenge I’d like to address today is pay compression across the Unites States. Simply put, pay compression can best be described as a situation where there is little pay difference across employees for the same role regardless of differences in skill level, tenure, ability, and performance. The pay band for the role is less elastic, with little difference in pay, and little growth opportunity for the role. This happened in 2021 across the United States as people that were forced to work remotely began to reconsider their jobs, and many opted out of work altogether, which we now refer to as “The Great Resignation.” Then there were others that used this opportunity to “job hop” from one company to another. In many traditional corporate environments, employees see the opportunity to gain their greatest increase in pay only when they leave one company and join another. And that’s what began to happen in earnest as more remote work meant more job opportunities across companies where geographic boundaries matter less to conduct the work at hand. Some people left because they were looking for more meaningful work, not necessarily the pay increase. Regardless, these factors all played a role in the war for talent, which caused companies to hire people on average at 20% more than the job is really “worth,” which contributed to the pay compression problem that we are facing today. So, now there is speculation that the job market may be softening, rumblings of layoffs are happening, and pay compression may become less of a challenge ahead. Or will it?

Within the sales organization, I believe there is a creative and unconventional way to address pay compression. As usual, we are rethinking sales, and solving problems creatively with little regard for past conventions. My approach to thinking about pay compression will have downstream impacts that will help companies reduce pay compression stress, manage their cost of sales and, with good execution, increase the productivity of the sales organization: arguably one of the most expensive and valued resources for any company selling products, services, and solutions.

Pay for Performance Incentive Compensation Plan

Building a Pay for Performance Incentive Compensation Plan

Building a Pay for Performance Incentive Compensation Plan

The first thing that I ask leadership to consider for the sales organization is the type of incentive plan that sales is part of. Sales is all about retaining, expanding, and growing new business opportunities for a company that impacts the bottom line. I am still surprised at how many companies pay the sales organization incentive based on corporate performance, instead of individual or (at most) team results. This is the first step to addressing pay compression. This is because best practices and attributes of an incentive plan carry with it a few principles that can be leveraged to differentiate low and high performance. It will no longer be a “peanut butter spread” effect based on corporate goal achievement. Putting the bonus on the individual will inevitably create greater pay differences based on achievement, which will counter the pay compression problem you face.

The principle we will explore is called the “Reverse Robinhood” principle. You may have heard this phrase that we use here at SalesGlobe, and it refers to the concept that incrementally low performers earn less than high performers. Further, it means that in your total compensation budget, that you reserve more dollars (or whatever currency you use). A simple way to explain this is by describing a stepped commission rate. In a stepped commission rate, the rate paid out for the sales you achieve are lower with less sales, and the rate increases based on how much you sell. This consequently creates a difference in pay between lower and higher performers. In the following illustration, the lines indicate the payout rate of based on performance. In this example, there is a threshold set which is a minimal level of sales that occurs before any incentive is achieved. This is set low, and everyone except your bottom performers should achieve this number. What is interesting in the graphic is that you will see that the higher the performance, the steeper the line becomes, and this means that the payout rate is incrementally higher than is paid out for lower levels of performance. There are many ways to address a pay for performance plan, this is just one simple example.

Pay Compression
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Pay for Performance Incentive Compensation Plan

Putting More Pay at Risk

Putting More Pay at Risk

Most salespeople are paid a base salary and a variable component referred to as target incentive. Together the components of base pay and variable pay equal Total Target Pay for a sales role. Pay mix is the percentage of base pay to variable pay. For sales roles, the pay mix can be anywhere from 90/10 for a client service type of role where the least amount of pay is at risk to a new logo hunting role that could be a pay mix of 50/50. Best practices follow the logic that those in a “hunting” role usually will have more pay at risk than service type of roles, where nurturing and building the customer relationship may be the key priority. Challenging this convention, I believe that today you can successfully build more overall pay opportunity for a role by increasing the incentive opportunity instead of increasing base pay levels, which should increase the opportunity for additional earnings for those that exceed the expectations you have for a role. This may mean that pay is more aggressive for roles than in the past, but also allows your top talent to earn incrementally more for their sales results.

Pay Compression – an Unconventional Approach for Sales

This approach will help companies achieve three things:

  1. Address pay compression in a Darwinian fashion. It’s survival of the fittest, however you describe “fit” for your own organization.
  2. Manage cost of sales by aligning increases in payout to results. Remember, if you adopt this model you can’t arbitrarily increase sales result expectations. The results still have to be achievable. If they are not, it won’t take the organization long to figure this out, and your best or “most fit” salespeople will leave.
  3. Build greater alignment of your salespeople with what you expect them to do in their role. The sales compensation plan is a communication tool that helps the sales organization understand where you want them to focus, and what is most important to the role. The greater the pay at risk, the more attention that will be paid towards this behavior.

Since I’m addressing pay mix in a non-conventional fashion by suggesting increasing pay at risk across all sales roles that may not align with conventional best practices, you can make this work by ensuring the objectives and goals align to what you expect out of each role, and ensure that the objectives and goals are achievable.

Pay for Performance Incentive Compensation Plan

Decontaminating the Sales Role

Decontaminating the Sales Role

Job role decontamination occurs when you take at the sales role activities with the objective to increase sales time by removing, or “decontaminating,” what are deemed to be “non-selling activities” that can be either streamlined, removed from the role and deployed elsewhere, or in some cases, discontinued altogether. For a sales role, what we know is that on average, about 40% of time is spent on sales activities, leaving a lot of opportunity to increase sales capacity- the time spent on sales related activity. Now anyone reading this is probably thinking… what on earth does this have to do with pay compression? Increasing sales related activity is a good thing but doesn’t address the core issue you may be facing with less elastic pay bands than you may have had pre-pandemic. I’ll argue that it does in that you can afford to address the first two recommendations above more aggressively if you know that you can increase sales capacity which invariably will increase the productivity of each role that is “decontaminated”.

How you approach activity documentation varies by company based on what you have available to you. I’ve seen everything from anecdotal collection of information from sales to measuring time spent with clients, on CRM, etc. What we like to do at SalesGlobe is initiate a time study using Sales Time Optimizer, a mobile application that allows you to deploy time tracking over the course of a period (2 weeks) where reps record their activities. Some of this can be automatically pulled from CRM for example, but the point is that we record where people are spending their time. Once you know where they spend their time, a workshop is held with management working together with the reps to review and identify value-added activities, where time is being spent, and where and how to streamline and redeploy non-sales activities. A sales capacity model should accompany the time study using actual sales results tied to selling time (let’s use 40% as an assumed baseline) and with increases of capacity, you can quantify the downstream impact to revenue and other sales results you expect from each sales role. This is a big win for companies every time. What you will discover is inefficiencies, opportunities and what really is and may not be working well today.

Whether you are facing pay compression or not, these three actions can help you manage your cost of sales, run a more efficient business, and help you weather the storm of ongoing economic and market changes that may be impacting your sales results and company performance.

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