The target pay level is the sum of money a sales person will get from both the fixed and variable parts of their salary combined. It includes all types of incentives and one off random sales contests, but does not include benefits.
The target pay is also known as the target total compensation, or total target cash.
This is a vital figure for everyone – sales people want to know what they can earn, and sales managers want to know what they will pay.
The Two Components Of The Target Pay Level
There are two parts to the target pay level:
The fixed salary. This is the amount a sales person gets on an annual basis, and is normally quoted as a gross amount. Many organizations have a flat salary structure that pays different amounts to sales staff depending on their experience and skills. Other factors that affect the fixed salary include years of service, number of contacts in the target audience, and their knowledge of the competition.
The variable salary. This is decided by the commission or bonus scheme in operation. The variable scheme follows the philosophy of the company, the particulars of the job role, and the objectives of management. The variable part can take many forms, including straight commissions, bonus schemes, a team pool, etc. Some variable salaries are created for specific roles.
The correct target pay level is an essential part of a company’s success. Every company that relies on sales needs a stable, effect sales team in order to succeed. An effective target pay level helps keep sales staff motivated, and increases staff loyalty, building a stable and reliable team.
Three Attributes Of An Effective Target Pay Level
There are three attributes that makes for an effective target pay level:
1. It follows the philosophy of the company
If the target pay level is out of step with the philosophy of the company, it won’t be effective. Team members at all levels need to understand the company philosophy, and it is important that managers do not undermine it by setting up a Target Pay Level that doesn’t match.
For example, if the company culture is to not pay commissions, adding commissions into the mix will not help. The only reason to add commissions in this situation is if not having them is harming the business.
Or say the company has a philosophy of focusing on the relationship with existing clients. Then it makes sense to add in commissions that reward sales staff for nurturing relationships with existing clients, and up-selling or cross-selling where appropriate.
2. It is competitive in the market
It is impossible to make good decisions without analyzing the market, comparing the company’s target pay level to others in the industry, and deciding exactly where the company wants position itself. If the company wants to find and keep skilled sales staff, they need to offer a competitive compensation package. The compensation scheme needs to be exciting for the sales people, and motivational enough to prevent a high turnover of sales staff.
3. It awards good performers and workers
Sales staff need to feel they will be fairly compensated for a job well done. If it seems that they are putting in the work and getting the results, but not receiving appropriate compensation, they will become demotivated. Sales staff are key to reaching the desired level of profit, and so the target pay level must be designed to reward those who work hard, and hit or exceed their targets.
Factors To Consider When Deciding The Target Pay Level
Deciding the target pay level takes time and research. There are certain factors management must take into account:
The stability of the company. If they can provide a safe working environment with less risk of layoffs, staff might tolerate a lower target pay in return for security and stability.
The competition. If the product faces tough competition in the market, an organization might need to pay more in order to attract the highly skilled sales people it needs to enter and stay competitive in the market.
Experience of sales staff. Staff with extensive and valuable experience cost more to employ – and they are worth it. The harder it is to find staff of the required skill level, the more a company must pay.
Effort required by the sales staff. If the sales person is involved in the process from start to end, including lead generation and closing, that means higher pay. If more people are involved in the process, the pay will be divided between them.
Product development plans. The strategy for future product development affects the target pay.
Whether the company is a start up. The start up environment comes with a greater risk, both in terms of ability to succeed, and in terms of how well new sales people fit with the culture and objectives of the owner. Sales people understand these risks – but they also expect and deserve higher pay to compensate.
Deciding Whether To Pay Above Or Below Market Norms
Every company, when deciding the target pay level, should research what the competition is paying. But that still leaves managers with the dilemma of what to pay in comparison to other companies.
To make this decision, the company must think carefully about their ultimate goals, both long and short term. The target pay level must be one that supports those goals.
Essentially, there are three answers to the question of how to position a company alongside the competition. They will pay:
- The same as the competition
- Less than the competition
- More than the competition
Let’s look more closely at each option.
Paying the same as the competition. This can be the less risky option – it is usually bigger and more well-established brands who are willing to take bigger risks when it comes to pay levels. There is nothing wrong with this approach – but companies must ensure their compensation scheme offers enough motivation to attract sales staff who could also choose to work for a competitor that offers similar pay. One way to tackle this is through a benefits package that sets the company apart from the competition.
Paying less than the competition. Companies who pay less than the market rate must ensure they offer compensation in another way. For example, they might pay less but guarantee there is no risk of losing the job. This tactic might work best for companies who are focused on building long-term relationships between their sales staff and their customers. Because sales staff are less focused on big payouts, it is possible to build a team that is loyal to the company and its values. Another pro of this approach is, of course, the lower cost to the company, both in terms of payouts, and in terms of turnover if they build a loyal team.
Paying more than the competition. Paying more than the competition can bring more success in the short term. For companies that need to build revenues fast, rather than build long lasting relationships, this can be effective. However, it can attract sales people who are motivated entirely by financial reward, who might then leave the company if they find a higher-paying opportunity. It can also encourage unethical selling, because getting the highest numbers becomes the name of the game.
How To Tell If The Target Pay Level Is Incorrect
When managers identify a problem with low production or high turnover of sales people, it is easy to blame the incentives scheme. Then they change the scheme, and wonder why the problem isn’t resolved.
Before rushing to change the incentives scheme, managers must ascertain if the scheme is the problem. There are several other reasons for low profits or high turnovers:
- Sales staff don’t fully understand the product or its benefits
- Sales staff don’t fully understand the market
- The product is not properly positioned in the market
- The scheme was badly communicated, so no one knows what to do or where to focus
- The team has misinterpreted the system
- The fixed part of the pay doesn’t represent the experience, skills, risk and seniority of specific sales people
It is vital to assess all these elements before deciding the total target pay is the problem. Management must look at the scheme as a whole in order to understand where the problem lies.
How To Decide The Target Pay Level
The target pay level is one of the first decisions that must be made when designing a motivation scheme.
To make the right decision, first think about the culture and the principles of the company. The target pay level must be in line with those. Rather than thinking about short term profits, managers must consider the long term plan for the company, and the brand and culture they want to create.
Only after analyzing these two points carefully, should managers consider the short term objectives. If the target pay level does not support the principles and long term plans, it will not work.
Remember that the incentives scheme, though vital for success, is only one part of building a successful sales team. Start at the top with principles and aims, and build the scheme around that so that everything is in line with the company’s long-term objectives.