Joe Regenstein, CPA, FPAC

Incentive Plan Pay Mix

Joe Regenstein, CPA, FPAC An incorrect pay mix can lead to a feast or famine situation, poor customer service, and open the door to compliance issues. A healthy plan needs a balance of base and at-risk pay to make up total pay. Base pay ensures the Business meets labor requirements for minimum wage, customer service, creating sales reports, or manager functions. At-risk pay is the variable portion of the incentive plan where the salesforce is rewarded (or not) based on their performance to quota. The ratio of base pay and at-risk are called On-Target Earnings (OTE). For example, a 70/30 pay mix means 70% of OTE is fixed base pay, and 30% of OTE is variable pay. The pay mix can be determined by how much influence the employee has on the sale and how much time they need to spend in non-sales activities. We also need to consider sales and pay cycles to have a well-rounded incentive plan.

“The more the salesperson can influence a customer to act, the lower the base salary as a portion of target total cash compensation and the higher the at-risk component. The opposite is also true: the less personal influence inherent in a sales job affects customer buying decisions, the higher the base salary and the lower the incentive opportunity.”

Cichelli, David J. “Compensating the Sales Force”, Third Edition: A Practical Guide to Designing Winning Sales Reward Programs (p. 15). McGraw-Hill Education.

A Sales Manager who does not interact with the customer will have a smaller at-risk percent than a frontline representative. The manager’s role will include managing human resource tasks, providing reporting, and completing analysis related to sales performance. In this case, a frontline representative may have 60% base pay and 40% at-risk (60/40). At the same time, their Sales Manager may have 80% base pay and 20% at-risk (80/20). When managers rely primarily on sales, they may utilize their persuasion on the salesforce negatively. They should be viewed as coaches and not try to squeeze their paycheck from their direct reports. This high-pressure environment will lead to turnover and entice the sales force to do whatever it takes to make their numbers. Wells Fargo recently paid $3 billion to settle a civil and criminal probe into the fraudulent sales practices. 

“The problems began when Wells Fargo executives pressured rank-and-file bank personnel to aggressively cross-sell products to enhance sales and revenue to meet certain quotas.”

Another consideration in the pay mix related to management is their ability to accelerate above the target total cash compensation (TTCC). When the Sales Managers’ performance measures are a rollup of their direct reports, their performance measure will be the average of those direct reports. It is unlikely that all direct reports are over-achieving in the real world unless we have an issue in the quota setting process. Therefore, it will be increasingly difficult for the Sales Manager to increase their TTCC. To compensate for convergence to the mean, consider utilizing a different performance measure scale instead of decreasing the at-risk pay. Now we can pay a Sales Manager according to the accomplishment of business objectives without the high-pressure environment. We can reduce fraud risk while providing an opportunity for an excellent Sales Manager to increase their earnings.

The length of the sales cycle can also have an impact on the pay mix. The Business should align the sales and pay cycle to tie performance to pay. The exception is a quarterly sales cycle paid monthly using a rolling 90 days as an example. If a sales executive is 70/30 for a monthly sales cycle, we may need to move to 80/20 for a quarterly process. Below is an excerpt from Xactly, a sales performance software company, regarding OTE and the sales role:

0/100 – This setup is basically pushing your reps to work heads-down and independently. Stress management becomes an extremely difficult task under such circumstances, and weekly payouts might be required.

50/50 – This is often a good starting point and allows organizations to exercise influence while giving reps enough security in their portion of fixed pay. With half of their earnings being variable, reps are still motivated enough to go out and sell.

90/10 – On the other end of the spectrum, there is little motivation tied to such a plan. That said, it has its place among admin staff, with their small portion of variable pay helping to connect them to the team and its success.

What is Pay Mix in Sales Compensation? | Xactly.

Financially, it may be tricky for a sales executive to meet the cost of living when they are only paid 70% of their compensation for 90 days. I have seen situations where the at-risk component is provided monthly as a ramp-up to transition the sales force from monthly to quarterly payments. The more aggressive the pay mix is, the shorter the pay cycle should be. For instance, a 100% at-risk may need to be weekly, while a 10% at-risk may work well for quarterly cycles.

Only with an understanding of the sales role activities and the sales cycle can we determine the proper pay mix.

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