How well can you explain (or defend) the way your company compensates sales employees? In today’s world, where pay transparency and compensation fairness are increasingly in the spotlight, sales employees and high-quality job candidates want to know more than just “how” your sales reps are paid. The “why” behind your compensation strategy is now a crucial factor, albeit one that many organizations fail to define.
What’s the difference between the “how” and the “why” of sales compensation? How you pay sales reps depends on the way you design your comp program, what metrics relate to what incentives, and so on— all the details we’ve covered in many past articles about comp plan design.
The equally important “why”, on the other hand, hinges on the bigger-picture foundation on which those comp plans are built. That foundation is your sales compensation philosophy.
In today’s blog post, we’ll explain what a sales compensation philosophy really means, why it’s important, and how you can establish a winning compensation philosophy that benefits both your sales employees and your organization’s bottom line. Let’s get into it!
What is a sales compensation philosophy?
A sales compensation philosophy is a documented overview of your business’s approach to compensating sales employees. It defines principles and guidelines for designing and managing sales compensation plans, while also outlining the specific business goals and results that this approach aims to achieve. Essentially, your sales compensation philosophy explains how sales employees are paid and why they’re being paid that way.
Let’s illustrate this concept with a few examples. Keep in mind: your documented philosophy will be more nuanced than these quick overviews— but these examples will give you an idea of how differences in sales compensation philosophy will impact everything from comp plan design to sales rep behavior.
Say that Company A adheres to a “sales-centric” compensation philosophy. This company wants to close as many deals and ultimately generate as much revenue as possible. They give sales reps more autonomy over which deals to pursue and how to pursue them, and their comp plans are designed to reward reps for bringing in a high volume of new business.
Compare that to Company B, who adheres to a “customer-centric” compensation philosophy. Satisfying customers and earning long-term business are this company’s top priorities; they only want to sell to prospects who are a genuine fit for their product. A company with this philosophy will build comp plans that aim to reduce customer churn and emphasize metrics around customer lifetime value, upsells and renewals. This company might also implement a more rigid sales qualification framework that equips reps to only sell to the right prospects.
Why is a sales compensation philosophy important?
Documenting a clear and thorough sales compensation philosophy is beneficial for a number of reasons:
1. Alignment with business goals
A well-defined philosophy ensures that your sales compensation plans and selling methods align with your business’s overall goals.
If your RevOps team is responsible for designing comp plans, a documented philosophy provides an outline of the broader objectives and priorities they should be considering. And, it helps to create a cohesive and unified vision within the sales team, motivating everyone to work towards common goals.
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2. Attraction and retention of sales talent
A solid sales compensation philosophy can help you attract and retain top sales talent, reducing sales turnover and recruitment costs. A high-quality candidate is far more likely to choose an employer who not only offers competitive compensation, but can also explain the reasoning behind their compensation strategy.
The same goes for a high-quality sales employee. A sales rep might not love every aspect of your commission program, but if they understand the logic and consideration that went into it, they’ll be more likely to remain engaged and motivated to hit their goals.
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Of course, compensation plans hold individual sales employees accountable for their performance and behaviors. But, a sales compensation philosophy also adds an element of accountability for the leaders and managers who make decisions around how reps are compensated.
Your sales compensation philosophy dictates the company’s understanding of and commitment to fair and competitive pay for sales employees. When your RevOps or finance team is building new comp plans, for example, they’ll be held to the standards outlined in your compensation philosophy, thus ensuring that every aspect of the comp plans they design are fair and unbiased.
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4. Comp plan consistency
Your sales department likely consists of a number of different roles, each role necessitating a different compensation plan. For example, the variable pay in an Account Executive’s plan depends on different metrics than an inbound SDR commission plan, as these roles have unique purposes and objectives. But, it’s still important to achieve some semblance of consistency across the various comp plans your business deploys.
A sales compensation philosophy outlines the shared priorities of the sales organization, the most important metrics towards achieving those goals, and how the compensation of each unique sales role relates to the organization’s overall success. This alignment-focused approach will help to foster unity across different sales roles and prevent conflict that could arise from perceived unfairness or unequal treatment.
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Your sales organization needs to be agile, constantly shifting their approach based on new objectives, new products, market changes, and more. Likewise, compensation plans require frequent updates and refinement to ensure they’re in line with the sales organization’s priorities and performance. But, you can face unintended consequences if your sales strategies and comp plans are constantly changing, especially if the people in charge of implementing these changes lack a unified sense of direction.
A sales compensation philosophy provides a solid blueprint for how to remain agile and adaptive without creating disarray and confusion. When major changes need to take place, you can adjust your philosophy, and the impacted teams will then know what micro-changes they need to implement to reflect a shift in big-picture priorities and objectives.
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Who should contribute to a sales compensation philosophy?
Before we proceed, a word of caution: the worst mistake you can make is to build out a sales compensation philosophy without getting input from a variety of perspectives and stakeholders. If you deploy a philosophy that doesn’t resonate with the people it impacts, you risk sending the wrong– or even harmful– message about your leadership team and your view as an organization on compensation.
A committee of stakeholders should be involved in brainstorming and deciding what factors are important to include in the sales compensation philosophy:
- Executives– Executives provide a broader business perspective, helping to strike the right balance between financial sustainability and performance-driven incentives.
- Sales Leaders– Sales leadership brings insights into the unique dynamics and challenges of the sales team.
- Finance Leaders– This team plays pivotal roles in crafting the technical aspects of compensation plans.
- HR Leaders– can speak for the company’s impact on employee experience and new talent acquisition as well as the potential legal regulations that impact salary and pay.
Make sure all these voices are accounted for, and you’ll be able to develop a sales compensation philosophy free of blind spots and biases.
The Top 5 Components of a Successful Sales Compensation Philosophy
Your sales compensation philosophy doesn’t need to be an exhaustive, lengthy document. In fact, we recommend narrowing your philosophy down to its most important elements— that way, it’s easy for everyone to understand, from sales leaders to sales comp managers to brand-new sales reps.
With that being said, here are some critical components you should consider including when building out your sales compensation philosophy.
1. Comp plan ownership
Start by defining which teams or individuals have ultimate control over the design and iteration of your compensation plans.
From there, list the secondary stakeholders who play a role in the comp plan design process. Does your finance team work alongside sales managers and RevOps personnel when creating new comp plans? Does a single sales comp manager have final say over comp plan design? Do HR and talent leaders review comp plans before they’re deployed to ensure they meet the company standards for fair compensation?
To ensure consistency and fairness, it’s important to not only document comp plan ownership but the procedures and best practices plan owners should follow when making decisions that impact sales employee compensation.
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2. Relative pay positioning
Relative pay positioning refers to how your organization’s sales compensation stacks up against market standards. Do you offer leading pay ranges (OTE above most competitors), matching pay ranges (OTE around the median of competitors), or lagging pay ranges (OTE slightly lower than most competitors)?
Among the many elements that you can include in a sales compensation philosophy, this is the one that requires the most frequent re-examination. While your business doesn’t necessarily have to promise leading pay ranges, it’s important to analyze the market and know exactly how your pay stacks up at all times. Promising competitive pay will only hurt your business if it turns out you’re not delivering on that promise.
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3. Pay mix
How will your sales employees’ total income be divided between base salary, commission, and bonuses? This ratio will play a huge factor in sales motivation, talent acquisition, and retention.
For example, a commission-heavy pay mix will incentivize top performers but potentially demotivate less experienced sellers— and it can make your company’s bottom line more volatile and hard to predict. Meanwhile, a base-heavy pay mix will give more financial security to sellers overall, but can demotivate top performers from going above and beyond to close deals.
Obviously, your pay mix will vary across different sales roles, as each role has a different level of influence on purchases. It’s important to outline these differences in your sales compensation philosophy, so each rep understands how their guaranteed and variable earnings are a result of their specific roles and selling activities.
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4. Prominence of pay
Of all the components in a sales compensation philosophy, prominence of pay is the most, well, philosophical. This term boils down to the following question: how important is individual performance and pay to your organization?
If pay has a high prominence at your organization, it means that each individual’s potential pay is the core driver of their performance— the pay is what each individual rep is chasing. Compensation programs exist to reinforce the specific day-to-day activities that individual sales reps should perform in order to earn their total target compensation.
If pay has low prominence, your compensation programs exist less to drive performance than to reward performance. Sales reps are still coached on best practices and ideal selling behaviors, but these factors aren’t emphasized as heavily in individual compensation plans. Your company culture revolves more so on shared initiatives, and sales employees have more of an equal share of bonus earnings based on the company’s overall performance.
While pay is highly prominent within most sales organizations, companies whose business models rely more on collaboration and shared objectives often succeed by putting less of an emphasis on individual pay, and more of an emphasis on overall company success.
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5. Pay differentiation
What is an acceptable variance between what your top sales performers, median sales performers, and bottom sales performers earn?
If your pay differentiation is too low— meaning, top performers don’t earn significantly more than the average performer— then you run the risk of frustrating and demotivating your best sellers. But, if pay differentiation is incredibly high, your sales organization’s success may be incredibly volatile; losing one of your top performers would be a massive blow to your bottom line.
Your sales compensation philosophy should define your ideal pay differentiation, as this information will be valuable to both comp plan owners and sales managers. If pay differentiation dips too low, a sales comp manager may consider adjusting comp plans to better incentivize top performers. If differentiation is too high, it’s a sign for sales managers to get more hands-on with their training and development of lagging performers.
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Unlike comp plans, your sales compensation philosophy doesn’t need to be something you’re constantly analyzing and changing. Once a year or so, gather together your executive stakeholders and determine whether any element of your compensation philosophy has changed or evolved.
These conversations happen informally all the time— but channeling them into a documented, transparent philosophy will help you solve problems faster, support a wide range of employees, and foster a more unified and transparent sales culture.
Spiff is a new class of commission software that combines the familiarity and ease-of-use of a spreadsheet with the power of automation at scale- enabling finance and sales operations teams to self-manage complex incentive compensation plans with ease. Spiff is designed to facilitate trust across organizations, motivate sales teams, increase visibility into performance and earnings, and ultimately, drive top line growth. The platform’s intuitive UI, in-depth reporting capabilities, and seamless integrations make it the first choice among high-growth and enterprise organizations.