Mergers and Acquisition Series Part 3: Pay Levels and Total Target Compensation

As the Mergers and Acquisitions series comes to a close, we will dive deeper into pay levels and total target compensation. Before making incentive compensation changes (plan design changes, alignment and pay levels) make sure you have your organization structure figured out and your coverage model well-defined. In the first part of our series on Mergers and Acquisitions, we talked about the importance of role definition and how roles that appear the same on the surface, when you really get down to it, are very different from one company to another. The second part of our series focused on incentive compensation alignment, which cannot take place until you have a clear understanding of the roles and how they map across each company. Remember to start with clear communication on your intentions and build a communication campaign that reflects the future merged business (“better together”, “stronger together”, etc.). The communication should include how you will manage operations in year one, and a roadmap for changes that you are planning to make (or not make). Getting the coverage model defined includes assessing both organizations from their strategy, go-to-market and enablement (tools, technology, pay), identifying synergies, outcomes, and biggest risks while developing a plan to address them. Some of the biggest challenges sales leaders will face in year one will be unexpected and unplanned attrition of the best talent, and a loss in revenue. The best method that we have found to address this is using clear and transparent communications. The role of the sales leader is to ensure that revenue does not contract. Growth in year one can be very difficult due to the internal changes that are taking place, but the greater the communication and clarity of messaging, the better opportunity you will have to retain the talent you want and the revenue that your shareholders and investors expect. Communications may include one-on-one conversations with high performers. Just as important, the data shows us that leaving the pay plans alone while you are figuring out the new coverage model goes a long way to ensuring you do not get that undesired attrition and helps with revenue retention as well. Your pay plan is a communication tool, and it should align to your coverage model and strategy while supporting your top revenue priorities.

Role Alignment

Now, let’s fast forward a year or so into the acquisition. You understand your coverage model, and your sales strategy reflects synergies and outcomes of the acquisition. Perhaps you are looking at integration of your sales teams, or perhaps they will continue to operate separately. That does not really matter, but there is one thing we do know. As you move ahead, inconsistent incentive plans and pay levels will inhibit career progression and do not encourage people to cross over into different parts of the business. They are also extremely difficult to manage and create the unintended consequence of measuring performance and managing your cost of sales.

During the process of role alignment, you should have the answer to the following questions:

•  What are people doing across your different sales roles?
• What differentiates one role from another?
• What skills are necessary and how much experience do you require for each role?
• What are the attributes of the products / services offered? Long versus short sales cycle, complex solution versus transactional sale?
• Is the role direct sales versus sales support?
• What is the revenue responsibility? New business, account management, or renewals?
• Is there a quota? What’s the size?
• What is your industry and what is market demand for your people, products and services?

Answering some of these key questions will help you understand pay levels that are appropriate, pay mix, and plan upside. This is a very important component of incentive compensation. Now, it’s time to start the pay benchmarking process. Pay benchmarking includes understanding what similar roles across similar industries are paying within the geographical region you are hiring from.

Pay Benchmarking

The biggest challenge that we have seen with pay benchmarking for sales roles is that the valuable components are missing when comparing to wide-scale available market data on pay. Here at SalesGlobe, we recommend and provide for our clients a holistic view on pay benchmarking that you can use in your own business. Typical pay data will include pay levels and bands, pay mix, role definitions and core responsibilities, industry breakdown and other important descriptors that help you identify the right match for your business. This data is valuable for companies and has been used by HR companies across the globe for decades for both non-sales and sales roles. The gap that that we have identified in the market is with the sales roles. We have learned through our experience that Total Target Compensation and Pay Mix are only part of the story. There are other components that you should consider when aligning pay levels across your own organization that will help you build a pay plan that is competitive, and very importantly, will pay for performance. In other words, your sales organization has a strong hand in controlling how much they can earn.

We have made this easy to identify the core components of a good incentive plan design by utilizing the Sales Compensation Diamond framework. You can leverage this to identify where your organization is today, and guide you to the best solution for plans that are consistent, within the control of the seller and differentiate various levels of performance.

Total Target Compensation

As we have already covered, it starts with your sales roles and C-Level Goals of the organization. This must be aligned before looking at pay. The Total Target Compensation is your base salary and incentive opportunity that is built into the plan. You should not use actuals at this point but rather use the target pay levels. That said, we have found within many companies, both global and regional in size that they don’t have this well defined. In that instance, you can use the averages for both base salary and actual incentive earned to calculate your current pay levels and pay mix. Now here is where it gets very interesting. Most organizations calculate the total pay levels, and then go on to build their pay plans without understanding what other companies may be doing and if there are any trends that they should be aware of to ensure their pay plans are competitive and fair. Looking to the diagram at your right, we start by looking at the key elements that are the framework for the plan. That includes the upside potential, which is any additional incentive opportunity that is available to a salesperson that is outside of the Total Target Compensation (TTC) package. TTC, as it is commonly called, is what you expect a person to earn once they have reached 100% of their performance level. Upside is additional earnings that are available once you exceed 100% of performance and this is the pay that is available for top performers.

At the same time, there may be a performance threshold that you will put into the plan. A threshold is defined as the point at which incentive begins to pay out. For some businesses, it may be from the first dollar, and very commonly for ongoing business and existing customers, there is some level of threshold performance expectation before incentive can be earned. We then look at linking Pay and Performance. This includes elements like your plan measures which may look like bookings, revenue, and/or profit margin. Depending on what the company priorities are and what the level of influence is of your salesperson, that is how you decide your plan measures. Finally, you want to look at your levels and timing of pay. Pay levels define if your plans pay at an individual, team or regional level and timing is when the payout occurs. A best practice is that incentives are paid as close to the timing of the sale, and the level should be defined by your coverage model.

Pay and Performance

The core elements of framing the plan and linking pay and performance are the biggest gaps that we see that Human Resources does not have market insight to compare to, and it can create a lot of noise across the organization. To address this, you should look closely at your sales priorities, ensure everything within the plan is controllable by the sales rep, and include market insight to ensure you are competitive or in-line with the market. This can be done by collecting this information both formally and informally through a benchmarking study. An informal collection may mean that your executives talking with other companies, and may include anecdotal information from your sales reps. Alternatively, a formal benchmark study can be handled through a third party to gather this information on behalf of your company. Either way, it’s a good idea to ensure you look at the holistic view of pay, and not just pay levels and pay mix alone.

The biggest line item for sales is pay. Ensuring you go through a holistic view of your pay plan will ensure that you build a plan that is aligned with your cost of sales parameters, and will differentiate various levels of performance. Given the last few years when we were faced with a war for talent, we know that a majority of fortune 1,000 companies now believe they are overpaying for performance and are trying to determine the path ahead. Headcount reductions and cutting pay levels is a short-term solution to a longer-term problem. We know that building a pay for performance plan that is consistent across the organization is key to understanding what the company is paying for, and what performance levels really are globally which helps identify where and how a strategy may need to pivot.

Our experts here at SalesGlobe would be happy to provide you information on our method to address pay benchmarking information that is specific to your business. With guidance, we can ensure you have a plan and pay levels that are appropriate, aligned with the market and your cost of sales requirements.

Sales Compensation Programs and Practices Survey Results

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.

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.