Mixed Up About Pay Mix?

By Per Torgersen

Recently, several of our clients have been grappling with the issue of pay mix.  Their questions and issues usually fall into three categories: “how do I determine what is the right pay mix for this sales role?”– (Mix Methodology), “my pay mixes are all over the place – how do I clean this up?” – (Mix Mayhem), and “how can I keep pay mixes steady on an ongoing basis” – (Mix Maintenance).

If you are grappling with some of these same concerns, we thought it would be helpful to share our perspective on how to address them.

Mix Methodology

First and foremost, we believe having a target pay mix for a sales role is essential.  The pay mix influences the level of sales energy and urgency in a particular sales job, it can impact the customer experience, and it should align to the cadence necessary to maximize sales success. Having a defined target mix is also helpful to provide guidance for recruiting, for finance purposes, and for ease of annual administration. However, companies often find that not everyone in a given role will usually be right at the target pay mix. Common causes include escalating base pay levels or legacy issues from mergers/acquisitions, internal job transfers, etc. So the first step of course is establishing the target pay mix.

Published compensation surveys can certainly be helpful in understanding total compensation levels and mixes for comparable roles, but they are only one part of the approach (author’s note: some surveys are better or worse than others).  You also need to think about the many factors that are specific to your company and role.  For example, answering key questions like “how prominent is the sales person to the sale”? – i.e., would the sale happen without his/her involvement because of other factors like your advertising campaign, promotions you are running, etc.?  More prominent roles tend to have more leveraged pay mixes, i.e., more on incentive pay.

However, this can be tempered by other factors like length of sales cycles; roles with more lengthy sales cycles tend to have a higher emphasis on the base salary part of the mix due to challenges in setting goals and anticipating when a sale (often substantial) is going to hit.  Additional factors to consider include whether the role is consultative or transactional, the culture of your organization, and others. At BSC, we use a pay mix toolkit that helps companies weigh the various factors to come to the right pay mix decision (click here to request more information).

The most important factor to remember is that there is no objectively “right” answer to this. It is part science, part art, and you just need to be comprehensive in the way you go about thinking through what’s right for your company and your sales roles. Establishing the right Mix Methodology is one of the most basic yet most important aspects of sales compensation.

Mix Mayhem

Our definition of “mix mayhem” is when target pay mixes for a role vary greatly – e.g., in extreme cases, pay mix ranges from 60/40 to 90/10 within the same role.  In those situations, after ensuring a target pay mix is defined for a role, we recommend first targeting the outliers whose base salary is particularly high with an overly-conservative pay mix.  While not always easy to implement, reducing base pay takes fixed costs out of the compensation budget and can generate more sales energy as target incentive goes up. This adjustment can actually benefit top performers because having a greater share of pay and a larger dollar amount in target incentive will allow accelerators to have a bigger impact, thus allowing for more upside opportunity in strong performance periods.

Subsequently, you can target those with overly-aggressive pay mixes, increasing the base salary proportion of the mix while decreasing incentive.  While adding to fixed costs, this can help bring in higher skilled resources for particular roles like Strategic Account Managers. Typically though, sweeping pay mix changes are challenging to implement all-at-once and organizations usually take them in steps over 2-3 pay cycle changes. But carefully making decisions to bring order to Mix Mayhem is an important best practice.

Mix Maintenance

The final challenge is to maintain pay mixes over time, which can be surprisingly tricky.  A common error many companies make is to apply merit pay increases only to base salary.  If the target incentive remains a constant amount, the proportion of fixed pay will become higher and higher, and you end up with an out of whack and overly-conservative pay mix that is not appropriate for the role.  Over the long haul, this approach means your most experienced reps evolve to more conservative mixes and can lose some of the hunger that made them strong long-term performers in the first place.

We recommend applying any pay increases to total compensation (base and variable combined), and then divvying up that increase between base salary and incentive target in alignment with the pay mix.  Mix will be kept consistent and you are tying some of that pay increase to their performance in the next cycle, not providing an automatic “handout.” This approach to Mix Maintenance should be the standard practice when providing merits to a sales force.

Pay mix is one of the first factors you need to consider when evaluating the effectiveness of your sales compensation program. It needs to be carefully set by role and then monitored annually to ensure it does not start to slide in an unwanted direction!