Compensation Pay Mix Selection

In my last article I discussed the perils of having a 100% salary plan or a 100% variable plan, but this begged a question…What is the RIGHT pay mix? If 100% of either is no good, then how much should be in the salary and how much should be in the incentive. I will answer as a true consultant…”it depends.” It depends on the role we are talking about, and the level of prominence that role has in effecting change.

Pay Mix is About Prominence

Prominence is a tricky word when used in this context. It’s a good English word that sales compensation consultants co-opted about 50 years ago to use to mean “ability to impact.” Often people will think it’s better to be more prominent, but there really is no value connotation to term. It’s not good or bad, it’s simply descriptive of the amount of influence present. It also bears no relation to the amount of total compensation set for the role.

The role of “door-to-door vacuum cleaner sales rep” is a highly prominent role. The Account Manager at Microsoft who handles the Dell account is a less prominent role. The Account Manager will certainly make more money than the vacuum cleaner sales rep, but there is more personal energy, effort, and sheer charisma and negotiating power required to sell those vacuums than there is for Microsoft to retain Dell as a customer.

Hunters vs Farmers: We need them BOTH

In the world of sales, you can break down roles between hunter and farmer type roles. Often this gets conflated to a perspective that “hunting is all that matters” but this is far from true. Farmers are equally valuable (perhaps more so, as without them the business will go under very quickly) and need to be valued for the role they play in the organization. But, they should not be compensated as hunters…or vice versa. These are two different roles with two very different prominence levels. Hunters are high prominence, farmers are lower prominence. This means ONLY that hunters should have more pay at risk than farmers do. This aligns risk with the ability of the individual in the role to control the outcome.

What is the right pay mix for Freight Broker Carrier Sales (Dispatcher) Roles

Carrier Sales roles are typically less prominent than either of the two main sales roles, but often they are compensated as 100% variable. This causes psychological stress as there are significant amounts of the pure carrier sales role that are outside of the carrier reps’ control…with the two biggies being the type of freight solicited and the price negotiated for that freight. If the sales rep is doing a miserable job, the carrier sales rep who is downstream will be stuck trying to make the best of a bad situation. How fair it is to compensate them solely on the total outcome when they had to start with bad inputs? Now, some of you are saying you want the back-pressure from Carrier Sales on Sales, to drive them to make better deals (or potentially jump them in the parking lot), but this can be handled within the bounds of a reasonably variable compensation plan for this role. Of course, it all comes down to degree of control – prominence. Can the Carrier Sales role change the outcome (short of threats)? Are they expected to call customers to solicit freight? In this case it is not a pure Carrier Sales role, but more of a hybrid role that would indicate a more variable pay mix. How closely do the teams work together? Is the Carrier Sales role on a very tightly knit pod or in a pool of resources going for “jump ball” freight? If the latter, then the role is actually more prominent as now the field is more level and there is equal ability to impact the outcome. If the role is pod dependent, then there is less ability to impact the outcome.

Pay Mix for Other Roles Besides Sales and Operations

As you move away from the core sales and operations roles, you find yourself moving into a realm of less prominence and less variability. Order Entry, Track and Trace, Team Leaders, Managers, and Back Office staff, all are less prominent than the core “individual contributor” roles found in sales and operations. However, the mechanics of this tend to form an hourglass design…with lower level roles having more pay at risk (more prominent), middle managers having less, but then Senior Leaders and Executives expanding back out for more pay at risk. This makes sense if you think about it. Middle managers execute other people’s directives, through other people. They may be FANTASTIC at what they do, but it would be very hard to tell specifically as they majority of their work is done through others. Sr. Leaders, on the other hand, set policy and direction, make critical “health of business” decisions, and can make or break and entire organization. They should have more pay at risk (just not so much that they are tempted to commit fraud – we’ve all seen where that ends up).

So what is the “right” mix? It depends. But some good guidelines are as follows:

Table for Understanding Pay Mix Options

Table for Understanding Pay Mix Options

Things that Reduce Prominence...and Indicate a Less Variable Pay Mix is Needed

When considering mix, think about things like brand recognition. Working for a major named company that everyone knows and respects gives you a leg up on the competitor working for Company No Name. Think about support systems: CRM, marketing materials, lead generation from support staff or management…all of the things that can make a sales reps’ job easy or a living nightmare. The more frustration, the less pay you should put at risk. The smoother the operations flow, the more pay can be on the line because the rep is now the only barrier to success.

Use pay mix and prominence with caution. As with many things in life, more is often not better. While CFO’s love the use of variable pay throughout the organization, doing this in extreme will create a dysfunctional organization with considerable role confusion, animosity, and a detrimental level of competitiveness. The trick is to find the right balance of pay mix among the roles, and in regard to the culture you are trying to engender.

This excerpt was originally published in the March 2014 issue of The Logistics Journal.

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