- It starts with compensation clarity. To properly set target pay levels, you need a clear compensation philosophy that includes a strategic pay positioning statement (i.e., where the company wants to pay against the market — at, above, below), good market data on benchmark jobs and a pay structure based on competitive data.
- Consider the company’s pay positioning. Pay positioning defines where a company wants to pay relative to the market. Many companies pay at the median or 50th percentile — right in the middle of the competitive market.
- Lean on market pay data. When setting target pay levels, an important input is the competitive pay data provided by reliable surveys and industry reports. Surveys provide competitive intelligence on the going rates in the market.
- Progress over perfection. Setting target pay levels is not an exact science. The more thought, input and vetting you do to determine the best levels for your organization, the better. Documenting your decision making and then tying it all together or aligning it to a corporate philosophy helps you explain and defend why the organization pays at the levels it does.
One of the most emotional areas of incentive design involves properly setting target pay levels according to the market. Get it right and the sales team feels good about the direction and opportunity; get it wrong and your decisions will affect everyone in the organization.
To properly set target pay levels, you need a clear compensation philosophy that includes a strategic pay positioning statement (i.e., where the company wants to pay against the market — at, above, below), good market data on benchmark jobs and a pay structure based on competitive data.
At any given time, there are certain factors that influence pay levers, it may be the economy, it may be the labor market, or it might be the need for customized talent. In any case, an organization needs to spend its money wisely and ensure that they target both the level of pay needed to attract the right talent and the expected output of the talent.
Strategically market pricing your jobs should include using qualified strategic data and intelligence to determine the salary and incentive for your sales jobs.
A company’s pay positioning policy has a direct impact on how pay is delivered and what a sales rep can earn for achieving quota. Pay positioning defines where a company wants to pay relative to the market. Many companies pay at the median or 50th percentile — right in the middle of the competitive market.
High-performing companies may wish to pay at the 75th, or even the 90th percentile. Still, others prefer a lower profile and set pay below competitive levels.
There are certain factors that come into play when determining pay positioning. Focusing on these factors helps to take any emotion out of the conversation and forces a strategic conversation to answer the pay positioning question.
- Degree of company stability: How solid is the company? Typically, startup companies have to pay more to attract top talent due to the risk implicit in a new venture. The more risk, the more reward is expected. More stable companies, or those with longevity and a proven business case or track record, may have less risk. Stability offers value, which is reflected in the total rewards strategy, allowing the company to consider lower targets.
- Desired business results: How likely is the organization to meet its business goals? Goals that are easily attainable make a case for setting target pay at median or below. Companies with tougher performance goals are more likely to pay much more for those results when achieved.
- Expected employee performance: What’s the sales rep’s performance level? As with the previous factor, the tougher the goal, the higher the opportunity generally will be.
- Productivity level: How productive is the organization? This primarily means margins or profit. If the company is profitable and sells services products that generate a lot of profitability, then more than likely they will/can pay for that through higher targets.
- Supply of talent: How abundant is the talent required for the job? Is it hard to get talented people? If yes, higher targets may be necessary to attract and retain them.
- Mobility of employees: How stable is the salesforce? Are the sales reps a group of “hired guns” who frequently move from company to company chasing higher pay? Or are they stable, loyal and likely to stick it out for the long term? The answer will significantly affect your positioning philosophy.
- Staffing: What’s a rep’s typical workload? Do reps work in teams? Many people performing the same job can lessen the workload on one individual or group of individuals. Similarly, working in teams spreads accountability, possibly giving each individual less influence over a sale. In such cases, target pay may be set lower. Conversely, in a very lean organization, the workload may be greater, thus requiring higher targets for greater effort and responsibility.
Using Market Pay Data
When setting target pay levels, an important input is the competitive pay data provided by reliable surveys and industry reports. Surveys provide competitive intelligence on the going rates in the market.
Benchmarking should occur at least every two years, if not annually, to keep abreast of changes in the market. Effective benchmarking requires good data from a reputable source.
Even with data from reliable sources, benchmarking is part art, part science — overlaid with significant emotion. You’ll never fully understand all the dimensions of the emotions that come into play. Therefore, it’s critical to debate the strategy, not the emotion.
A good rule of thumb is to obtain as much survey data as possible, show examples and identify all findings and approaches. And always link discussion and decisions back to business strategy, job roles and compensation philosophy.
Considerations when deciding on your benchmarking sources include the following:
- Availability of published survey data: Select surveys from reputable associations or consultants.
- Cost: Surveys are not inexpensive, but discounts are usually available for participants.
- Age of the data: Most surveys are conducted every year or every other year. The fresher the data the better. If you are going to age the data (to bring data from all sources to a common date), make sure you use an industry standard for the year(s). If a survey is too old, the data will be suspect, even if aged.
- Data reliability and validity: The survey source should have a history of reliability and include appropriate participants, (e.g., the right industries—your business and people competitors—and companies of comparable size and reputation) and a sufficient number of participants. The better the group of participants, the better the data.
- Types of jobs: Job matches must be “apples to apples.” If a survey description differs significantly from your benchmark position, consider adjusting the data (plus or minus), using another source. A 10% adjustment is typical; if more than 20% is necessary, it’s probably a bad match.
- Ease of use: Look for surveys that provide data by percentile and by scope (e.g., company size) and use a clear methodology. You might have to defend your market analysis so make sure you can document and defend your choice.
The key point to remember is that setting target pay levels is not an exact science. The more thought, input and vetting you do to determine the best levels for your organization, the better. Documenting your decision making and then tying it all together or aligning it to a corporate philosophy helps you explain and defend why the company pays at the levels it does.
Ensuring you keep this process in mind will help ensure that you have followed the proper practices for pay levels.
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