The Best Compensation Plans Are Cheaper Than You Think
When it comes to sales compensation plans, most organizations wonder what percentage of revenue (or profit) they must pay their salespeople in software sales commissions to stay competitive with the marketplace.
Since most sales compensation plans consist of no more than a base salary and bonus scale, you can't blame them for trying to establish a monetary baseline as their first (and sometimes only) step in developing a compensation structure.
In his book The Compensation Solution: How to Develop an Employee-Driven Rewards System, John E. Tropman makes the case that limiting the compensation conversation to monetary rewards doesn't form a true partnership between the employee and the company where the success of each is inextricably tied to the other.
Tropman outlines a total compensation plan that aligns pay at four levels (money, perks, opportunity, ecosystem) to tightly align the motivations of the people and the organization while giving both more of what they want from the work contract. That's a concept that can be applied beyond software sales commissions to the entire company.
According to Tropman, companies should design their Total Compensation (TC) plan to accomplish three things:
- Encourage retention of their best employees (Top 20%)
- Balance inflow/outflow of the middle mass (Middle 60%)
- Encourage departure of the rest (Bottom 20%)
This is a more revolutionary idea than you might think. Tropman does not suggest the outright ranking of employees against each other- a practice that got Ford Motor Company and others in trouble with employees in the late 1990's.
Instead, he proposes that inflows/outflows are driven naturally from the total compensation structure, which we'll discuss below.
Employees view Total Compensation (TC) as a set of motivators and satisfiers (or demotivators and dissatisfiers). Tropman's model for total compensation includes four levels of pay:
TC = (BP+AP+IP) + (WP+PP) + (OA+OG) + (PI+QL) + X
- BP - Base Pay
- AP - Augmented Pay (variable bonus, including one-time payments)
- IP - Indirect Pay (healthcare benefits, 401(k), etc.)
- WP - Works Perks (subsidized equipment, gear)
- PP - Perks Pay (employee discounts, memberships)
- OA - Opportunity for Advancement
- OG - Opportunity for Growth
- PI - Psychic Income (environment, co-workers)
- QL - Quality of Life (flexibility, options)
- X - Unique Elements (things employee wants work to facilitate/accommodate)
The Compensation Solution asserts that employees weigh these elements as a total set when deciding to take a new position or to stay on in a current one.
Managed as a holistic unit, the TC framework gives the company more options in sales compensation plans to attract and motivate talent than just software sales commissions, while also affording employees more opportunity to self-actualize than simply demanding raises every year.
Company View + Employee View
Conversely, if the Perks, Opportunity, and Ecosystem elements are ignored and allowed to atrophy into dissatisfiers then employees will be left with no alternative but to demand more Money as payment for their lack of satisfaction at work.
Many companies "solve" this problem with de-facto annual raises in Base Pay (BP) that hurt both the company's pocketbook and employee engagement, according to Tropman, especially when applied without regard to each employee's specific contributions.
Top employees leave for more rewarding conditions (or lower their engagement levels to match the incentive structure) while the bottom tier stays for the easy money. Absent the best producers, corporate growth tends to slow; a lose-lose situation often exposed for all to see during economic downturns.
An alternative solution structures Base Pay (BP) to reflect the employee's role (pay the job) and skill level (pay the expertise) while Augmented Pay (AP) is highly flexible- the better to reward the employee's effort on a successful project (pay the results).
Consistently-won bonuses- signifying a top 20% employee- can then be factored more permanently into Base Pay (BP) on an individual basis. A worker that receives little Augmented Pay (AP) and few (if any) increases to Base Pay (BP)- a bottom 20% employee- will look for easier pickings elsewhere.
In an economy driven by engaged knowledge workers (and drained by disengaged ones), the Total Compensation (TC) structure from The Compensation Solution is an idea whose time has come.
Where could your company hone its "total compensation" approach? What would change in your organization if sales compensation were customized to the attitudes and performance of each employee?