There are countless articles about how company culture is affected by leadership, organizational structure, communication tools, etc. However, the impact that your sales compensation structure has on overall company culture is often overlooked. When building out a sales team, business leaders often think about structuring compensation in a way that aligns with their budget and their sales cycle. We would like to make the case that alignment towards desired company culture should also be a consideration.
The first sales compensation variable that will influence company culture is pay level benchmarking.
Pay level benchmarking defines the market segment companies compare their overall compensation structures to and align with the talent they are trying to attract. When considering an offer, most companies do not give a candidate the on target earnings they request but instead define an overall compensation band structure (e.g. compensation range based on role level) that is commensurate with the experience, skills, and pedigree for the open role.
Many companies express this as a percentile that corresponds to the quality or seniority of the hires the company wants to make. For example, companies on a premium model (i.e. benchmark at the 90th percentile of the market) are looking for experienced and seasoned reps who have the discipline to effectively manage long sales cycles, complex clients and processes. Companies on an economy model (i.e. benchmark at the 25th percentile) are looking to save compensation budget and focus on hiring junior resources - knowing that additional investments will be required before production gains. This model works well with lower deal sizes (such as selling into SMB) and more transactional sales models, because reps are more affordable, and therefore more can be hired.
In a company that hires senior reps, there is likely to be a correlation between age and experience, so you may have a culture that is more accommodating towards individuals with families or working parents. In a company that hires reps that are a few years out of college, you’re more likely to see colleagues spending time together outside of work, sharing tips and best practices and potentially blurring the lines between work and life. Neither culture is better than the other, but they can be quite different.
The other sales compensation factor that can impact company culture is pay philosophy, or the amount the company wants to differentiate earnings between high and low performers.On one end of the spectrum is the egalitarian pay philosophy where companies do not significantly differentiate between high and low producers. This can be achieved in a number of ways, from having a less aggressive pay mix for reps so that there isn’t as much of an opportunity to overachieve to measuring reps on a team goal where everyone is paid for the same achievement - promoting an “everyone wins” mindset.This philosophy works well with companies with long and complex sales cycles - like Boeing where reps sell airplanes - because reps are incentivized to work together on multi year deals and everyone can share in the success, reducing the impact of boom and bust cycles on multimillion dollar deals.
On the other end of the philosophical spectrum lies the darwinian pay philosophy, characterized by dramatic pay disparities between high and low producers. Companies who employ this philosophy enable earnings differences by setting quotas higher - think of setting extreme stretch goals for your reps - and adding in thresholds in the plan where reps earn a reduced payout until achieving a baseline level of performance. Companies that employ this philosophy tend to use the compensation program to manage reps out of their sales organizations. Oracle is famous for this. Reps who do well at Oracle can make enormous gains. But there are countless ex-Oracle sales reps who failed to perform at Oracle and became star performers elsewhere.
At CaptivateIQ, we generally recommend that companies employ a competitive pay philosophy where the full upside of the compensation program is reserved for the top 10% of earners, with the rest of the sales team being able to earn at least 60% of their target incentives.This philosophy promotes trust in the compensation program because you’ll be able to point to more than just a handful of reps who were successful and earned solid money. But this philosophy also creates a culture of collaboration that is backed by healthy competition.
Want to talk with an expert about how CaptivateIQ can empower you to implement the right sales compensation structure for your team? Contact us here.