For sales organizations scattered throughout the world, sales compensation presents a unique challenge.
Should you have one global pay plan? Or should sales compensation designers configure the pay plans to match local conditions and practices?
One camp insists that sales compensation plans should be universal: An account manager in the US should be paid like an account manager in the UK, Japan and Columbia. The other faction argues that selling is “local,” and pay plans should match the local job role. Frankly, both parties can see the merits of the others’ perspective. However, the biases remain: One team favors global solutions, the other favors local solutions. Oh, and don’t forget about the third camp, the folks who say, “well, it depends.”
What We Know
As we consider the question of global sales compensation practices, here are truths we know.
- Worldwide Use. Revenue leaders use sales compensation throughout the world to reward sales performance. It’s a common management practice regardless of history or legal stipulations. However, it’s always best to remember that using sales compensation is a management choice not a preordained program.
- Similar Jobs. Many customer contact jobs operate in a similar fashion across the globe. Well, kind of. As we discuss below, differences in job design will impact sales compensation plans. It’s a simple question: Does the account manager in the US, Japan and Canada function the same? If “yes,” the pay plans will most likely share common features. If “no,” expect pay plans to differ from region to region.
- Local Markets. Target pay levels follow local labor markets. Regardless of exchange rates and the cost-of-living variances, pay levels are set to be competitive with local labor market practices.
- History. History counts. “Momentum management” carries proven practices into the future. These legacy methods have latent value: People know how they work and making changes will be disruptive. The implication: Make changes only to serve compelling business implications. This excludes making changes solely for administrative simplicity.
- Leadership. Local/region leadership often configures pay systems to match management philosophies such as program eligibility, extent of seller teaming, and aggressiveness of at-risk pay. Unless HQ mandates worldwide people practices, local pay systems will reflect these belief systems.
- Legal and Regulatory Compliance. No question, from country to country, numerous legal and regulatory requirements affect the application of sales compensation programs, including works councils, unions, mandatory year-end bonuses, pay-reduction restrictions and signed acknowledgment requirements to name the most common.
What Does the Data Say?
Numerous surveys (examining country variances) found more commonality than disparate practices. As an example, one factor that should highlight pay plan variance among countries would be the degree of pay at-risk. However, survey responses seem to confirm only modest variance of at-risk pay among countries for the same job.
Source: Alexander Group’s Sales Compensation Hot Topics Survey
As the chart suggests, the degree of pay at-risk for the account manager varies by less than 5% among the listed countries.
Prevalence of Practice—A Fruitless Search
Prevalence of practice is a benchmarking concept that uses market research to identify the most prevalent practice for adoption. “Let’s see what others are doing; that’s what we will do!” Unfortunately, prevalence of practice does not offer a definitive path for making sales compensation design decisions. Why? There are too many factors affecting the sales compensation design for a specific job at a specific company to reveal a dominant market practice. Variances will affect sales compensation such as product competitiveness, management philosophy, go-to-market strategy, value propositions, sales process model, job design, and rewards strategy. A summary of pay plans from other companies will not identify the best choice. Yes, the research will be educational, but not conclusive for plan design purposes. However, do collect market pay data to establish target total compensation amounts for each job.
The Best Solution: Global Sales Compensation Design Principles
One approach solves the perplexing issue of global versus local sales compensation plans: Adopt global sales compensation design principles for local application. That is, apply universal design principles to all jobs regardless of location. Fortunately, this approach avoids interpreting dissimilar region go-to-marketing practices, and yes varying local management philosophies—a practice that needs addressing elsewhere. Whatever is “different” will be inherent in the local job—for good or bad. The brilliance of this approach simplifies the question of differences by allowing (the local) job design to drive the sales compensation solution. Global sales compensation design principles use the same set of rules for each job, regardless of configuration. Job content determines the best pay plan.
Once designed, adjust for any local legal and regulatory requirements.
Here is a simplified example of global principles.
- Eligibility. Job incumbents are eligible for sales compensation (pay at-risk with upside earnings potential) if they have customer contact, customer influence and measurable goals.
- Target Total Compensation. Gather pay data and apply the company’s competitive level (e.g., 60th percentile of market practices) to set target total compensation/on-target earnings for each job.
- Pay Mix. Split the target total compensation into base pay and target (at-risk) incentive. Use a deeper pay mix (e.g., 60/40 base/incentive ratio) for jobs with high customer influence and use a lower pay mix (e.g., 85/15) for jobs with less customer persuasion.
- Leverage. Provide upside earnings potential to match the competitive practice of the 90th percentile of labor market rates. Do not cap the plans.
- Measures. Use no more than three output measures: sales volume and perhaps additional strategic measures of product mix or profitability. The sales volume measure should be more than 50% of the available incentive monies. No measure should be worth less than 15% of the target incentive.
- Quotas. Use addressable market potential and current share to allocate quotas. Plan for 55% to 65% of all sellers (by job) to reach and exceed quota. Remove unpredictable mega orders from the quota; provide adjusted payout schedule for these orders. Remove unpredictable new product launches from the quota; provide a contest/spiff to reward these efforts.
Additional principles address sales crediting, account assignments and pay/performance periods.
Solving the Unsolvable
Use global sales compensation principles to design effective sales compensation plans regardless of differences found among divisions, regions and local leadership.
Authored by The Alexander Group, Inc.®