As you consider sales compensation pay, there are three levers available to you that should align with your sales process and strategy, and when done well, will drive the behaviors and outcomes that you expect. These components are the level of pay out, (from the company level to the individual) the frequency, and of course, the performance measures which drive the outcomes that you expect and have prioritized.
Our survey results demonstrate that companies are leaning in on financial measures in their plans that align with best practices for a sales role.
The most important measures across all sales roles are bookings (also known as confirmed order, or contract signing) and revenue (which could be measured at any time from invoiced revenue to when it is recognized). This demonstrates that companies are finding ways to balance paying as close attention to the sale as possible with a booking measure, while helping them manage their overall cost of sales with paying at least a portion of incentive once the customer has been invoiced or revenue has been recognized. Bookings usually “count” on execution of a contract, which may not align closely with recognition of revenue. The risk of paying out all incentive on a bookings measure is that this revenue may not be realized to the company, and there is a concern that cost of sales will increase to an unsustainable level unless some pay is “clawed back” or repaid to the company at the end of the year. This is a bad practice for everyone. This concern is most relevant for companies that offer recurring revenue products and services, a strategy that continues to grow across all sectors and company sizes. Gross profit is a useful measure where there is flexibility in sales price and a wide margin distribution across products and services. This helps ensure companies stay profitable while growing their footprint in the market.
Incentive compensation plans are becoming more specific and focused using primarily two to three measures. 71% of organizations use two to three performance measures in their plans, holding steady from 2021. Whenever there are more than three measures used in a plan or if measures carry less than 15% weight of target incentive, it tends to dilute the focus on what’s most important to accomplish.
We also found that companies are shifting back to individual measures, giving sales reps greater control over earnings based on their individual sales efforts. High quota uncertainty during the pandemic led to greater team and region measures in 2020 and 2021, which created a lot of noise within the sales organization, particularly with high performers. Although individual targets are coming back, we are still seeing pressure being put on the quota setting process due to global macroeconomic conditions, including that pertaining to supply chains and cost of goods sold.
Sales roles with the responsibility of identifying new business opportunities, which can include new customers, geographies or buyers, lead headcount increases in 2022. These sellers continue to have the greatest portion of pay at risk, reflecting performance focused on new growth results in order to earn incentive in lieu of account management and retention which typically has less “pay at risk” in the plan.
We have also seen the evolution of the inside sales role, from lead generation and hand-off, to order taking and issue resolution, to one that is also focused on expanding existing business and winning new business deals. Pay at risk for inside sales roles has increased from an average variable pay of 30% of total cash compensation to an average variable pay of 38% of cash compensation since 2020. We believe these pay mix shifts signal that companies are making sure their sales organization supports a strong sales culture and will continue to emphasize a focus on sales results through growth across all roles.
When companies put greater weight on variable pay, they tend to also provide competitive upside opportunity, further incentivizing sales reps and aligning with a true pay-for-performance philosophy. Upside pay, which we define as additional incentive opportunity for those that exceed sales expectations, is most aggressive in global and enterprise-level organizations over small and mid-size companies. Additionally, healthcare and technology companies tend to offer greater upside opportunity reflecting the high growth and competitiveness within these sectors.
As organization incentive pay levels increase to hire and retain top talent, they have concurrently decreased the use of incentive caps that were increased in usage across some industries throughout the pandemic years of 2020 and 2021. However, they are not doing away with pay controls overall and are instead favoring softer guardrails to mitigate how much they pay out to top performers.
Regressive payouts and mega-deal policies, which limit pay for extremely large deals (typically defined as more than 50% of an annual sales expectation) are increasing in adoption, correlating with companies removing caps in plans. These offer an alternative for companies to continue to reward high performers for all their sales efforts encouraging them to close as much business as they can within a plan timeframe while managing their overall cost of sales. This once again supports a pay-for-performance philosophy.
WorldatWork, in partnership with SalesGlobe, conducted a survey to gather information on sales compensation plan structures and practices to reward for sales success and drive performance to the goals of the business. Click here and complete the form to receive your copy of the full survey results.
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SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.
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