Every sales-driven company needs to nail down a well-rounded sales commission plan. This plan is extremely crucial to motivate the salespersons to achieve their sales quotas within the given timeframe. Sales commission plans vary across companies and are based on several internal factors. There are still many common aspects that feature across most sales commission plans such as target pay, base pay, and on-target earnings. It is crucial for you to leverage external and internal data sources to create an accurate and attainable sales commission plan. An integral part of this plan is the pay mix, and you must make sure that every salesperson has a clear understanding of the on-target earnings and the KPIs in the compensation plan.
What is a Pay Mix?
As per the pay mix definition that most experts agree on, it is a combination compensation plan that defines the ratio of base salary to target incentives that are a part of OTEs. Based on the industry standards, the salesperson's profile, and the company’s pay mix policy, this ratio can range from 60:40 to 75:25.
It is crucial to offer salespersons a base salary as their work involves much more than selling. They would need to attend to several administrative tasks that are not directly linked to sales. This includes attending conferences or processing sales data. This time that has been spent away from the sales must be compensated for by the company. Hence, irrespective of the sales they have been able to complete in a period, the base salary covers the everyday needs of the salespersons.
The other part of the pay mix strategy, i.e., variable pay is a crucial factor in motivating the salespersons to perform to the best of their abilities. This compensation depends on the deals they have been able to close in a period. Companies may or may not have a cap in place on the maximum amount the salespersons can make during a period.
How to determine the right pay mix?
There is a vast range of options that you must determine what the ideal pay mix for the salespersons in a company should be. You can opt from salary only to commission only to a balanced pay mix policy. There are various factors that you must consider while deciding the structure of your commission plan, such as,
- What is the pay mix strategy in the industry?
- How hard the salesperson needs to work?
- How are your competitors paying the salespersons?
- How difficult it is to make a sale?
- How many clients is a salesperson handling at one point?
- Who is generating the leads for salespersons?
When you analyse these factors, you will be able to determine a unique pay mix strategy for your company. Generally, an average pay mix features 60% fixed and 40% variable compensation while a less aggressive pay mix would feature 70% fixed and 30% variable. But what is the optimal pay mix for your company?
The answer is industry benchmarking. Different industries follow compensation plans that are unique to them. Likewise, you must factor in the pay mix policies of other companies in your sector along with your internal policies. This will enable you to compare your compensation plan with others and create a well-rounded strategy to motivate the salespersons.
How to set a pay mix?
As per the pay mix definition, both the components, i.e., fixed pay and variable pay, should add up to 100%. Hence, you need to ensure that the pay mix you create for your sales professionals should conform to this rule. You will need to determine how much of the total compensation would include fixed pay and how much would be made up of variable pay. Whether it is 80-20, 70-30, or 60-40, the total must always add up to 100%.
When you are setting the pay mix, it is vital to consider that the role of the individual will have a great impact on the result. Most experts agree with the rule that the higher the influence of a sales rep on the sale, the higher should be the variable pay and the lower should be the fixed salary.
Here are some general guidelines to set the pay mix for varied sales profiles:
- Sales Executive: It is the role of the sales executive to close deals as they are in direct touch with the clients. Hence, their pay mix should be aggressive at 60-40 or 50-50. Though, you need to factor in the length and complexity of the sales process.
- Business Development Executive: It is the role of business development executives to generate leads and new opportunities for sales executives. But as they are not directly involved in closing the sales, so their pay mix should be less aggressive at 70-30 or 80-20.
- Customer Success Executive: A customer success executive is responsible for ensuring customer satisfaction. Hence, the risk involved is lower as compared to a sales executive. Hence, you need to have a less aggressive pay mix here such as 70-30 or 80-20.
- Sales Manager: It is the duty of the sales manager to train salespersons and guide them in the sales process. Hence, their pay mix will be less aggressive as they are not directly involved in the sales process, such as 80-20.
Calculating pay mix:
To define a pay mix strategy, you must learn how to calculate the pay mix ratio. It is the ratio between the base salary and the variable pay. Most companies determine it at the start of a calendar year wherein they divide the base salary with the on-target earnings (OTE). To calculate the variable part of the ratio, you must divide the variable pay by OTE. For example, if the base salary for a salesperson is $90,000 and their OTE is $150,000, then the pay mix ratio is 60:40.
Based on the performance of the employees, there will be a lot of variations in their pay mix. In such a situation, you must refer to base and actual commissions earned instead of the OTE. For instance, a salesperson might have been able to earn higher commissions at around $90,000 with the base salary being fixed at $90,000. In such a situation, their pay mix must be updated accordingly to 50:50. At the end of the year, the average pay mix of your salespersons should be closer to the target pay mix.
What's the average pay mix?
There is no fixed average pay mix definition. There are many factors that must be taken into consideration while determining the average pay mix for your company. Some of the factors that you must consider are:
- What is the average pay mix in the industry?
- What is the benchmark pay mix in the country?
- What is the average pay mix for the competitors?
- What is the internal policy of the company?
- What is the cost of living in the location?
It is crucial to ensure that the average pay mix you implement in your company must factor into these parameters. The pay mix must ensure that the basic needs of the employees are taken care of and at the same time, it should motivate them to push hard to achieve the targets.
Overview
Having the right pay mix is vital to ensure that sales professionals are motivated to achieve their quotas and targets. To reach the optimal pay mix for your company, you must ensure that you factor in the career aspirations, team culture, and personal recognition needs of these professionals. It is vital to remember that the process of setting a pay mix is an ongoing exercise and you would need to work on it continuously to achieve the desired results.
FAQs
Q1. What is the pay mix strategy?
A1. A pay mix strategy is an approach followed by a company to determine the ratio between the base salary and variable pay.
Q2. What are pay mix examples?
A2. Pay mix examples will help you learn more about the ratio between fixed salary and variable pay. Some of the common pay mix examples can be 70% to 30%, 80% to 20%, or 60% to 40%.
Q3. Why is pay mix important?
A3. If you have a poorly structured pay mix, it will lower the motivation levels of the salespersons and result in missing the sales quotas.
Q4. What are the factors affecting the pay mix?
A4. Some of the factors affecting the pay mix are the complexity of the sales process, industry benchmark, competitor pay mix, and several others.
