The Importance of a Compensation Philosophy

Creating compensation plans for world class teams

I started out thinking that the whole purpose of sales was to make commission. Sales was a job that had upside based on performance and my job was to maximize my upside based on my incentive plan.

Then I had to write my first incentive plan. I messed it up and didn’t know what I was doing. Primarily because I didn’t have a compensation philosophy.

A compensation philosophy describes your approach to incentivize your reps that meet both the short term and long term goals of the business.

Definitions:

All-in Comp - the total amount a rep gets paid when you add up all of the compensation forms and shows up as the sum total that shows up on their W-2.

Incentives - a portion of all in compensation that is often variable, sometimes there are non-monetary incentives (we will go into that in another article).

Here are some categories of compensation:

• Commission

• Auto Allowance

• Base Salary (or Base Pay)

• Benefits (Health, Stock Purchase Programs, etc…)

• Bonuses

• Misc (Cell phone, Internet allowance)

To create a compensation philosophy you need to determine what all-in compensation range the job should pay and then determine the categories of compensation you will use. You can then work on the ratios (meaning the percentage or ratio each component of the all-in comp) for those categories.

For example - I believe a rep selling our services should be able to make between $150K-$250K. I would use Base + Commission + Benefits (Auto and Cell).

In my compensation philosophy I believe the ratio of commission should be 60-70% of their all-in comp. so I do a base of around $50K + auto and phone of $8K which is about 40% of the lower range the rest being commission + benefits (60%)

My goal is to pay enough in base to give value to job but not enough to be comfortable to live on without making commission.

I also believe that commission is for new business (not for maintaining current clients) so in the compensation plan I’ll account for that.

So in this case we have an outside rep position that can make between $150-$250K aligned with my compensation philosophy of base + commission + benefits with a 60%+ ratio of commission to all in comp and the commission plan will be geared towards new clients.

How do I determine the commission?

In this case - I use a percentage of revenue collected for new business - I could add a bonus percentage for year one to your commission plan to keep new business top of mind and the focus of sales efforts. The percentage will depend on your average deal size, sales cycle time and lifetime value of a customer.

The best plans are simple to understand and allow a rep to easily connect their activity to the commission they earn.

So what is your compensation philosophy going to be?

Do you have one and haven’t articulated it?

Drop me a line if I can be helpful.