Setting up pay strategies for long-term love affairs

By Adam Bernstein, Monday 06 February 2017

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Salespeople are the beating heart of a business; without the revenue they generate no other parts of a business will function for very long. The question is, how best to incentivise sales to work well, individually and as a team?

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First principles

The Chartered Institute of Professional Development (CIPD) suggests that any pay structure “should be carefully designed to support the business strategy of the organisation and to provide a clear and non-discriminatory framework for pay progression and career development for employees”. It also needs to be flexible to adapt to the changing business environment and should also consider any local variations, especially where the cost of living is higher.

Pay structures should reward or encourage behaviours which, in the case of sales, is performance in seeking revenue-generating business according to the goals set by the employer. It’s interesting to note that the CIPD believes that many smaller organisations have no real defined pay structure of any kind.

Duncan Brown, the Institute for Employment Studies’ head of HR consultancy, says there are three steps to creating a pay structure: “The first step to consider is the total level of pay, taking account of the value added by the sales roles and the market rates for similar roles. Second comes the split between fixed and variable pay. Third, the make-up of the variable pay needs to be agreed with the main distinction being between commission – i.e. the pay as a direct proportion of revenue and/or profit, and bonus – cash lump sum for agreed results and how those results are achieved.” 

Brown thinks that also relevant are decisions such as performance measures, timescales for results, the mix of team and individual performance targets, and the treatment of adjacent roles such as sales support, etc.

Dani Novick, director at Mercury Search & Selection, sees the practical effects of this. For her, the question of whether pay should be skewed towards base or commission is rather academic: “Whilst there are clear arguments on both sides as to which is best, market forces determine what happens in reality. Market demand has determined that remuneration in the print sector has always been biased towards base pay and the abolition of tax incentives for profit-related pay at the end of the 1990s only reinforced this.”

But how to set the targets that need to be achieved? Jonny Giffords, organisational behaviour advisor at the CIPD, suggests that employers need to set objectives that maximise the performance outcome that the employer wants; this he says is fundamental to increasing performance.

To do this it makes sense to “set objectives based on measurable outcomes such as profit generated. Objectives should be clear, specific, challenging yet achievable.” He recommends that firms follow the ‘smart’ mnemonic (specific, measurable, agreed, realistic and trackable) when setting targets. 

He says: “Smart means, in reality two things – the objective should be specific (time- or person-based) and challenging (it stretches the individual). These two characteristics work for certain jobs such as sales positions where roles are typically predictable.”

But pay goes beyond the simple ‘instant hit’ of a sale. Pay needs to also address wider impacts on sales staff. If you focus only on objectives and how staff are managed, the sale made and commission sales people can make, staff will take a very narrow approach to performance. On this Giffords says employers need a positive interaction between sales and customers every time, even if a sale isn’t made: “Salespeople are brand ambassadors and need to look beyond a possible sale – the customer may not buy today but could tomorrow. If a salesman in that position gets a sniff of the customer not making a purchase then they may not be particularly helpful to that customer – it’s really serious in the long term for the company.” His view is that very narrow pay structures and management can be counterproductive.

It makes sense then that pay structures encourage salespeople to promote the company and if appropriate, the team. “Here,” says Giffords, “you should set team targets so that everyone gets paid on anyone in the team selling – pay structures can create a stronger sense of cohesion.” 

Chloe Themistocleous, an associate at law firm Eversheds, agrees: “Employers generally find team targets encourage employees to work together for a common goal and assist one another. Targets where employees are in competition with one another can affect team morale and spirit negatively if not managed properly.” Similarly, Themistocleous thinks a bonus scheme should be something that all employees can participate in and one where they are on equal footing with one another at the outset.

Rates of commission

Before deciding on the base/commission split to pay, it’s important to recognise that while there are several factors influencing pay for sales staff “it’s clear”, as Novick puts it, “that there is a proportional link between base salary and projected turnover, i.e. higher salaries go with higher turnover. Whilst this is entirely to be expected, employers should be wary of viewing salespeople as having portable turnover and seeking to directly buy in that turnover.” Often clients don’t follow the individual as they’re frequently tied into service agreements.

One thing is certain though, the market rate for a given role is well established and to a large degree standard within each sector. Novick says that the exceptions to this are usually in companies where they haven’t recruited for some time, for example owing to low staff turnover. “When these companies come to market they may find their pay structures are out of step with the going rate. This causes two issues, firstly they have to offer more than expected and secondly they have to manage the impact on existing staff and pay scales.”

While base pay or commission is the question, its answer depends how a firm wants to leverage profit-related pay and whether they’re in a bidding war for a given individual.

In recent years, says Brown, there’s been a shift from low base and high commission to higher base and lower bonus and commission. “This is particularly so for key account roles selling high-value items over longer time periods. Further, employers are paying more attention to total rewards for salespeople – promotions and recognition – they’re rewarding valuable behaviours rather than just paying on end sales results.” Interestingly, Brown believes that base pay should reflect the core skills and competencies that someone brings to a job, while variable pay, commission, should reflect their performance in the job and the scale of the impact they have on the sales outcome. He adds: “It’s a myth that all salespeople need to be motivated with short-term commission.”

But once pay structures are set it appears from what Novick says that companies rarely review them – she suggests that firms generally only change when HMRC provides new tax incentives. She adds that the wider issue for this range of benefits is that they may be useful in securing or retaining staff but quickly become the norm and expected – they stop becoming incentives or motivators.

In Novick’s experience, a typical senior sales package will include base salary, commission, car, laptop, private medical insurance, and employer pension contributions.

No matter the make-up, Giffords says that firms need to strike a balance; staff need security in their role, but they also need to know that if they work better, harder or more effectively they’ll get more rewards. “If base pay is too low you’ll have a conditional attitude from workers; they’ll only be happy if they hit a higher rate of pay and their loyalty will not be long lived. But if they have security of a decent base they’ll keep going even if they have a bad day.”

There is one further point to note here: parity of pay. There is a strong desire within people for fairness. If unfairness is perceived it can cause some very negative reactions. Pay structures should be transparent and open – that everyone is on the same footing if they perform. However, actual pay clearly needs to be confidential.

Other incentives

Of course, while cash is king employees also look to other forms of reward such as profit-sharing, share ownership and pensions. But do they work?

On this Giffords sees incentives as a way of further tying employees to the company more directly – to give them interest in the longer-term financial status of the company. But there is a problem: “The difficulty with incentives is that we tend to focus on the short term rather than the long term when it comes to rewards; many want their rewards immediately and would rather have half a cake now than a whole cake in a year’s time. In other words, the psychological value of long-term benefits can be less motivating.” 

Novick agrees, seeing logic to the argument: “Even commission paid on ‘house’, pre-existing or long-term accounts is effectively static and so quickly becomes taken for granted.” She adds that however generous an overall package may be, employees become numb to any incentive effect.

This is why Giffords says that with long-term incentives organisations need to continually communicate their benefits. Further, share ownership in the broader sense could be linked to decision-making. Consider the John Lewis model where partners are involved with the decision-making process and see company results linked to their pay.

Themistocleous thinks that giving an employee shares in the company can increase their commitment. “For incentives to work the employer needs to set a certain long-term goal or target for a key employee to achieve – for example, to double the revenue by 2020.”

However, she points to other incentives that firms can offer: “Employees can also elect to give up part of their entitlement to salary or bonus which is subject to income tax and National Insurance contributions in exchange for a new or enhanced non-cash benefit, which benefits from a full or partial exemption from tax or National Insurance (or both).” But with a note of caution, Themistocleous says that the government recently outlined its intention to restrict the benefits that attract tax and National Insurance advantages when provided as part of a salary sacrifice arrangement. Soon the only benefits excluded from the restriction will be employer contributions to registered pension schemes; pension advice; employer-supported childcare; cycle-to-work schemes – and ultra-low emission cars.

None of this prevents firms offering other benefits, it’s just that they can’t be set off against tax. And talking of tax, Brown says that it shouldn’t drive your sales reward strategy: “It’s a relevant contextual factor, and the government’s changes have at least rendered the reward landscape pretty neutral. Share schemes can be an effective tax-free retention device.” 

Bonuses

Pay goes beyond base pay and commission; there’s also the issue of bonuses and how they’re paid. Themistocleous says that while all payments should be paid via payroll and the necessary deductions for tax and National Insurance should be made, payslips should however stipulate what elements of pay are base pay and what elements are bonus or commission.

Unlike commission, bonuses can be used to reward employees for good performance in different ways dependant on the employer’s business and objectives, namely meeting or exceeding targets or receiving a certain level of positive customer or peer feedback. 

It’s important to recognise that bonus and commission payments can be contractual or discretionary. Themistocleous points out that if an employee meets the criteria for a contractual bonus to be paid and the employer does not pay the bonus they may be in breach of contract, which can result in the employee making a claim against them. If the employer elects to have a discretionary bonus scheme the employee has no right to a bonus – payments are made entirely at the employer’s discretion and on the employer’s own terms. “The employee’s terms and conditions should stipulate if any bonus scheme is contractual or discretionary. Employers should be careful to ensure they have clear policies for contractual commission and bonus schemes outlining who can participate; what criteria is to be met to qualify for a bonus/commission; over what period/duration will the scheme run; how payments are calculated; when payments will be made and the circumstances in which bonus payments will not be made.”

Bonus and commission payments don’t need to be set in stone – they can be variously flexible, can run at certain times and regularly updated on a weekly or monthly basis. This works especially well, according to Themistocleous, in sales environments where a business may wish to boost sales of certain products one week and different ones the next. Novick goes further in outlining the goals. She says that for work to be profitable it requires much more than just a salesperson to sell it. It must be planned properly, materials bought at best prices, it must be produced efficiently with minimal waste – all of which requires each part of the business to do their bit: “A bonus based on company profit can very effective at making these links real in staff minds.” Pay based on turnover, to her mind, is pointless.

There is also the thorny question of whether commission or bonus payments should be clawed back. Here Themistocleous says employers should be careful to ensure bonus schemes (especially for contractual bonuses) are clear on whether bonuses will be paid after employees leave the business: “Most employers elect to include clauses in employees’ terms stating bonuses will not be paid after employment has ended or whilst the employee is working their notice.” 

She adds that employers may have policies for ‘good’ leavers, who may still be paid a bonus, and ‘bad’ leavers, who will not. Good leavers are typically those who are made redundant or are leaving due to ill health while bad leavers are likely to be employees who have been summarily dismissed.

The biggest issue with profit-related pay schemes is that of privacy and it’s something particular to print says Novick. “There is a preponderance of small private companies [in the sector] who typically want to minimise tax liabilities and want to keep profit figures confidential.” She reckons that both factors hamper profit-related bonus schemes.

Whatever the company view on pay, Brown reckons that communication is at least as important as the scheme rules: “All salespeople hate claw-backs, but it’s required at times.” He thinks it’s better for employers to encourage sales to build quality in up front rather than to try and penalise lack of it at the back end of the process.

In conclusion

At the end of the day, the pay structure is whatever works in the given circumstance and will vary according to a firm’s needs and place in the sales cycle. The key is to have an eye on profit, fairness and the market rate as employees are mobile and the power of the web makes pay far more transparent. 


The BPIF advises

Charles Jarrold, chief executive of the BPIF, says that remuneration is a delicate mix of base pay and commission, with the variable element ideally based on profit rather than turnover: “The risk with an excessively commission-based scheme is that staff may be incentivised to do things which are not consistent with the long-term success of the business.” He adds that in a well-structured scheme, it should not be necessary to claw back commission.

Jarrold sees a place for bonuses in targeted specific campaigns: “The challenge, however, is that winning work and building a business reputation is a team effort, and individual bonuses can detract from this.” His view is that incentive schemes should be structured to fit in with the goals for individuals which then feed into departmental and the overall business plan, noting that business is after all about teamwork.

Pay within print seems to be segmented. Here Jarrold sees smaller print companies use the old structures of high pay, car, etc, or high basic plus commission on turnover while larger companies have well-thought-out schemes. “Volume-based schemes were popular in the past, as press utilisation correlated closely with profitability, and these schemes were okay if the management team kept a close eye on pricing levels. These types of schemes are increasingly anachronistic and inappropriate, and so should be reviewed carefully,” he says.

To succeed managers and owners need training on how to manage the sales function and sales teams. Says Jarrold: “Most do not understand that sales is as much a process as the processes they use in production. They allow their salespeople to manage themselves and are then surprised when they do not perform, or are allowed to deliver work that is not appropriate.”

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