Sales Transformation
The Art and Science of Setting Smart Sales Market Pay Rates
Learn the art and science behind setting sales market pay rates that can help secure your organization’s competitive edge.
October 02, 2023
Your sales pay level is about more than just dollars and cents. It’s critical to strike the right balance in your sales compensation strategy so you can motivate your sales team. If you get it wrong, not only will you hurt the morale and productivity of your sales team, but your entire organization will suffer.
That’s why setting your sales pay rate is both an art and a science. Joe DiMisa, Senior Client Partner, Sales Effectiveness & Rewards Advisory Leader at Korn Ferry explains that to get it right, you’ll need two things: a clear compensation philosophy with a strategic pay positioning statement and accurate pay benchmarking data.
A clear compensation philosophy with a strategic pay positioning statement
“To set target pay levels accurately, you must begin with a well-defined compensation philosophy,” says DiMisa. This philosophy includes a strategic pay positioning statement that indicates the company’s stance on pay relative to the market: at, above, or below market pay rates.
While some companies opt for a median pay approach and set their rates at the 50th percentile, high-performing companies may set their sales pay rate at the 75th or even the 90th percentile. Others choose to set their pay below market rates.
“The key to determining the right pay positioning for your organization is to eliminate the emotion from your decision-making,” advises DiMisa. Instead, guide your conversations by asking the following questions:
- How stable is your company? Assess the riskiness of your pay positioning. If you’re a well-established company with a proven track record of success, you likely have less risk and can afford to set your pay targets at a lower, more conservative level. If you’re a startup or in an inherently risky industry, you may need to offer higher compensation to attract top-tier talent.
- What are your business goals? Easily attainable goals may justify setting target pay levels at or below the median. In contrast, sales organizations with ambitious performance targets may need to offer higher compensation for achieving these goals.
- How difficult is the work? The more sales representatives have to work to achieve their performance goals, the higher the compensation they’ll expect.
- How productive is the organization? To measure productivity, consider your organization’s profit or margins. Profitable companies with high-margin products or services are better positioned to offer higher target pay levels.
- What does the talent supply look like? In situations where top talent is scarce, organizations may need to offer higher compensation to attract and retain the best candidates.
- How stable is your sales team? What is your employee turnover rate? What is the average tenure of your sales reps? If your sales ranks are full of “hired guns” always looking for the next best opportunity, you may need to raise your pay rates to secure their commitment.
- How do you staff your organization? The typical workload and team structure in your organization are crucial factors to consider. A larger team sharing responsibility for reaching goals can lessen the workload and lower target pay levels. Leaner organizations with increased individual accountability and greater influence over sales may require higher targets to compensate for each seller’s efforts.
Accurate pay benchmarking data
Setting pay benchmarks can be fraught with emotion and lead to heated debates. To defuse tension and take the emotion out of the equation, sales organizations need to look to objective factors; namely cold, hard compensation data.
But you can’t just set and forget sales market pay rates, says DiMisa. “Frequent pay benchmarking is essential to stay on top of market fluctuations,” he adds. At a minimum, sales organizations should benchmark market rates for sales representative salaries and sales manager salaries at least every two years; for the most accurate information, they should benchmark compensation annually.
Effective decision-making regarding target pay levels relies heavily on comprehensive market pay data from reliable sources, such as surveys and industry reports. Key considerations when selecting benchmarking sources include the following:
- Reliability: Choose surveys from reputable associations or consultants that regularly publish benchmarking data.
- Cost: Surveys can be expensive. Keep in mind that if your organization participates in a benchmarking survey, you may be able to snag a discount.
- Age: You need fresh data to make the best decisions; outdated data will lead you astray. Most surveys are conducted once a year or every other year. If you are going to age the data so all of your sources share a common date, use an industry standard for the year(s).
- Validity: Choose survey data based on participants that mirror your organization’s industry, size and reputation. The data must also be based on a sufficient number of participants to be reliable.
- Job types: Ensure that job descriptions in surveys align closely with your benchmark positions. Minor adjustments (typically up to 10%) using another data source may be necessary, but significant disparities (>20%) may require you to use an alternative data source.
- Ease of use: You must be ready to defend your market analysis, so choose surveys that provide data by percentile and scope (e.g., company size) and that use a clear methodology. Document why you chose the data you did and how you used it to reach your conclusions.
DiMisa advises sales leaders to keep in mind that the more data you have, the more accurate and convincing your findings will be. “Always link your pay level discussions to your compensation philosophy, job roles and business strategy.”
Invest in the art and science of setting sales market pay rates
Setting sales market pay rates is part art, part science. Invest a significant amount of time and thought into the best pay levels for your people—then verify your decisions with data. Then, be sure to document your decision-making process and align it with your corporate philosophy, so you can persuasively defend your compensation strategy.
Visit our sales effectiveness solutions page to learn how Korn Ferry’s experts can help position your sales organization more competitively in the market.
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