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Sales compensation pays incentive dollars for sales results. But what about base pay? What role does it play for sellers?
Although not flashy nor as dynamic as the incentive element, and sometimes an afterthought, base pay is often a large portion of total earnings for sellers.
Consider these questions:
- What is the role of base pay?
- How do competitive market practices affect base pay?
- Should sellers receive base pay increases?
- What happens to base pay for job level promotions?
- How do geographic differentials affect base pay?
- What are the other types of base pay programs for sellers?
Before we delve into these compelling questions, we need to reacquaint ourselves with the two primary base pay management systems: base salary ranges and target total compensation (TTC) ranges.
What’s the difference? Plenty.
Compensation professionals ensure pay programs are competitive with labor market practices, well managed and equitable. Pay ranges provide flexibility to reward employees as they increase their competencies and impact. Learning performers are paid less than the target base pay. More experienced, higher performers are paid more. The base pay system needs to accommodate these variances in seller value and competency growth. Pay ranges provide this flexibility.
Let’s set aside the 15.7% who reported not using pay ranges in a recent Alexander Group survey. We will address them later. Almost 85% of the respondents use either base pay or target total ranges. The survey identifies base pay ranges as the most popular means to manage base pay as favored by 50.5% (33.1% with unique seller base pay ranges, plus 17.4% who use the standard corporate base pay ranges). The remaining 33.9% use TTC ranges. How do the two systems work: base pay ranges versus TTC ranges?
Companies divide sellers’ pay into two elements: base pay and target incentive. When added together, they represent the TTC for the job. In a base pay range system, target base pay is the midpoint of the base pay range. The base pay range provides monies below and above midpoint for base pay treatment. New incumbents or poor performers may have a base pay below the base pay range midpoint. Whereas better/more seasoned performers will earn a base pay above base pay range midpoint.
Target total compensation ranges do not use the base pay as the midpoint. Instead, TTC pay ranges use the target total compensation amount as the job’s pay midpoint. The TTC range offers a total spread of earnings for incumbents. This range includes both the base pay component and the target incentive amount. In the TTC range system, sellers get an increase in the TTC (their combined base pay and target incentive amounts), then management applies the mix of the job (e.g. 70/30) to derive base pay and target incentive for each incumbent. In other applications, particularly for entry-level selling positions, management sets the same base pay and target incentive for all incumbents.
Base pay ranges offer the flexibility of providing uniquely derived base pay and target incentive amounts for each individual job incumbent. There is no requirement to communicate the TTC for the job or inform the incumbents of their TTC. While the job will have a policy pay mix, individuals may have different pay mix portions of their TTC due to individual variances in base pay and target incentive.
Target total compensation pay ranges ensure a uniform allocation of monies based on the pay mix for the job. Since sellers get an increase to their TTC prior to applying the pay mix for the job, all incumbents will have the exact same portion of TTC split between base pay and target incentive. Providing the increase to the TTC ranges, provides another benefit of ensuring the total pay amounts keep pace with wage inflation.
Both systems have their pros and cons. Often, the practices reflect corporate history. For example, many tech companies use TTC ranges propagating legacy practices of early tech companies.
What Is the Role of Base Pay?
Management offers base pay for labor acquisition and retention purposes plus bolstering employee cash flow. Having quality applicants and personnel is a minimum requirement for an effective revenue function. One might wonder, why have a base salary at all? Producers seldom have base pay such as real estate agents, brokers and manufacturers’ reps. However, most sellers are “sales representatives” and not producers. Yes, producers are often paid a commission on all sales; no base pay and an unlimited earning horizon. In a sense, producers are independent businesspeople. Meanwhile, companies hire sales representatives to “represent” their products to prospective buyers. They are “purchased labor” and normally have a target earning with “managed” upside earnings (but not caps — hopefully).
Some would argue that base pay pays for everything other than sales results. There is some logic to this argument. However, base pay increases should reflect cumulative sales performance success.
Base pay also influences an incumbent’s borrowing power. Management wants to ensure sellers can borrow to purchase homes and cars. To qualify for larger loans, sellers must show proof of regular commission earnings.
Finally, base pay progression provides a means to grant base pay increases rewarding sellers for increased competency, learning, certification accomplishment and individual merit performance.
How Do Competitive Market Practices Affect Base Pay?
Sales jobs’ pay range midpoint and target incentive — added together — provide the target total compensation for the job. Management may wish to pay higher or lower than market rates. However, varying widely from market practices should have a compelling reason.
Once management has determined the competitive target total compensation for the job, then the company can apply the pay mix to derive one of two pay range structures: 1) base pay range or 2) target total compensation range. The base pay is the outcome of the pay mix, the split between base pay and target incentive as portions of TTC. The pay mix reflects the degree of persuasion applied by the seller to convince the buyer to purchase. 50/50 (base/incentive) would be an aggressive pay mix. 90/10 would be a shallow pay mix.
Regardless of the pay range structure — base pay or target total compensation — competitive market rates help determine the company’s competitive rate for the job. Management applies the pay mix to identify the base pay opportunity.
Should Sellers Receive Base Pay Increases?
Short answer: Yes! There are numerous reasons to grant base pay increases: wage inflation, seller increasing value, sales outcomes and seller retention.
However, the data is not universal. One-fifth (21.7%) of the companies will not provide base pay increases to sellers in 2021. This percent has been true for years. So, no, there are not universal annual pay increases for all sellers.
As the first chart displayed, most companies vary base salaries among individual sellers. Only 2.5% pay the same base pay to all job incumbents.
Most companies (66.2%) tie base pay increases to merit performance (46.2% allow manager discretion and 16% use a merit guide chart).
What Happens to Base Pay for Job Level Promotions?
Larger, more mature companies frequently use job levels, such as sales associate, sales representative I, sales representative II, and senior sales representative. These levels provide criteria for advancement. Management can tie advancement to a variety of factors: proficiency, corporate citizenship, time, performance reviews and cumulative sales results. These job progression promotions provide an increase in base pay, too.
More than 70% of all companies in the survey have some type of geographic differential by labor market. The practices may be formal and specific to the sellers (33.6%), tied to a national range structure (26.7%) or local flexibility (9.2%). Geographic differentials affect base pay. Some tie the geographical variance to the cost of living; the correct practice is to tie the geographic factor to labor costs. Geographic differences will be reflected in base salary amounts.
What Are the Other Types of Base Pay Programs for Sellers?
What about the 15.7% who do not use base pay ranges or target total pay ranges? Well, their practices may or may not vary. They might have base pay and TTC pay levels that vary by incumbent (12.4%) or base pay and TTC that do not vary by incumbent (3.3%).
Base pay is sales compensation’s silent partner. It’s often a large portion of total earnings. Invest in aligned programs to ensure effective application of base pay.
Consider these practices:
- Use market data to set TTC.
- Manage base pay by using salary ranges or TTC ranges.
- Determine pay mix using the degree of seller persuasion.
- Grant increases each year to sustain target pay mix and wage inflation parity.
- Use merit increases to recognize individual performance, proficiency and competency.
Sellers expect you to effectively manage their base pay programs. Invest the time to get it right.