Surveying Sales Incentives: True or False?

Have you ever found yourself in a situation where the competitive market price for your sales employees didn’t make sense?  Where the numbers didn't add up?  Usually it’s the incentive piece that has you double-checking; you’re expecting an incentive value of 25% or 30% of base pay, and the survey reports much less.  How can you report those figures back to management?  Your credibility, as well as that of your data source, would be under serious question.

An uncomfortable feeling, isn’t it?

Management wants to see competitive total cash compensation.  At the end of the day, what a reasonably performing sales employee should be paid.  How much should we be paying someone for hitting their quota figures?  That total cash amount would include the incentive portion added to base salary.   But sometimes the market picture isn't quite that clear.

A distorted view

Surveys typically report incentive amounts that were paid out, vs. a target or expected amount.  Which is okay, because the large amount of respondents within the survey tend to average out the better vs. weaker performers (high incentive payments vs. low) to present a reasonable approximation of target.  Which in turn is helpful when comparing your company targets against market realities.

However, to find a useful incentive figure presumes that the respondent payments represent an overall average.  And nine times out of ten that presumption is valid.  For sales jobs though, there is the likelihood that a much broader swing of actual payments would depress the average payment figure to something less than what the plan designers had intended.  Employees receiving little or no incentive would be counted along with those who have hammered their plans and received very generous awards.  The survey will report zero incentive payments in the results.

This creates a distortion, effectively low balling average incentive compensation (and total comp), as well as altering the view of competitive marketplace incentive targets.  This scenario is especially problematic when the sampling of participating companies is more scant than robust.

For example, if your sales job pays 40% of base salary for on-target performance, you would be somewhat concerned to see that the market reports a 20% incentive being paid for a well matched comparison.

Now look to your own organization.  How many of your sales employees achieve 100% target?  Does your average payment (including all sales employees) approximate the target payment percentage from the sales compensation design?  Likely your own number is markedly less.  If it's not, then perhaps your sales targets are too easily achieved.

This reporting situation is made more awkward (to explain) when instead of a compensation analyst it’s a wannabe HR generalist flipping pages through a survey and writing down as gospel whatever number they find.

So what is a survey user to do?

Be careful to check whether your survey source(s) is reporting paid incentive, target incentive, or both.  When using multiple surveys remember that blending target amounts with actual paid incentives (which may be unavoidable, based on survey formatting) may distort your results, at least somewhat.

So if the results you get look a bit squirrely, you need to use a little common sense before making any competitive pronouncements.  The same sense you would use when reading results from a good year's performance (economy flying high) vs. bad results (the great recession).  Both can distort how the market relates to your plan design and target total cash.

You might wish to factor in an adjustment percentage (5% or 10%) when assessing market results against your plan design target.  To counterbalance the impact of the zero payments.

Or leave it alone, but don't forget to tell (and periodically remind) management that the incentive cash figures for sales employees are likely lower than what your own organization is experiencing - and what are common practice plan designs.

So have a care when market pricing your sales staff.  And keep an open eye on whether the sales job incentive figures make sense.

Chuck Csizmar CCP is founder and Principal of CMC Compensation Group, providing global compensation consulting services to a wide variety of industries and non-profit organizations.  He is also associated with several HR Consulting firms as a contributing consultant.  With over 30 years Rewards experience Chuck is a broad based subject matter expert with a specialty in international and expatriate compensation.  He lives in Central Florida (near The Mouse) and enjoys growing fruit and managing (?) a brood of cats. 

Image courtesy of Leeks

Comments

[Jeff Haynes]

Chuck, a very thoughtful post...

I would add that many traditional Compensation analysts might not even be aware of the intricacies of market pricing incentives. Sales Comp is a different Animal, and there for it requires a specialized zookeeper.

Agreed - always be aware and capture actual vs. target. Don't blend it.

Agreed - always be aware (at least generally) of corporate performance within the sector in which you are working. If sales / earnings are down in a sector, chance are good that performance relative to target will be off too...

Also - I like to remind people of the differences in $ versus %. Obviously if you express you incentive as a % (like 20% of base pay), the dollar amount you are targeting will vary widely by individual within your company even if everyone performs at target. Now, compound that by 100 when 100 firms dump their data into a survey.

Also - I like surveys that show average "mix" on target total cash. That tends to give you a good picture of the amount of cash it takes to be competitive in the market, and the typical ratio of fixed to variable that it takes to reward that type of a job.

Remember - the bottom line to all benchmarking is that it should be INFORMING, not CONFORMING. Let it inform you, but don't let it over run the uniqueness of your business situation.