What is Pay Mix Ratio?
More than 60% of companies rank themselves as average or below-average at sales compensation. Only 54% of companies believe enterprises have proper incentives in place to attract and retain the best talent.
Given these dynamics, you should have an optimized compensation structure to retain and motivate your sales force. Getting the pay mix ratio right will have a big impact on sales performance and employee engagement.More than 60% of companies rank themselves as average or below average at sales compensation. More than half think their incentives don't attract or retain top talent. Sales compensation is clearly very broken. #salescomp #sales #incentives Click To Tweet
Here’s everything you need to know about pay mix ratios.
What is a Pay Mix Ratio?
A pay mix ratio is the ratio of base salary to commission.
A pax mix ratio of 60/40 pay mix means that 60% of an employee’s compensation consists of a base salary, and 40% consists of commission.
How to Calculate Pay Mix Ratio
Calculating the pay mix ratio is pretty simple. Most companies estimate it at the beginning of the year by dividing the base salary by the On-Target Earnings (OTE). Divide the commission portion by OTE to get the variable side of the ratio.
If their base salary is $60,000 and their OTE is $100,00 then the pay ratio is 60:40.
Typically there will be quite a bit of variability among employees by the end of the year, depending on their performance. When calculating how it actually turned out, replace OTE with base + actual commission earned. For instance, a top performer may have the same base of $60,000 but earn a much higher commission of 80,000, bringing their total pay to $140,000.
In that case, the equation goes: (60,0000/140,0000) : (80,000/140,000). Or about 43: 57. The average pay mix across employees at the end of the year should be around your target pay mix.
Why are pay mix ratios important?
Pay mix ratio is an important factor when salespeople are evaluating potential employers and employment offers. For example, a sales employee who receives two employment offers worth $100,000 might prefer the employer who provides a higher base salary. That would typically depend on their personality and their confidence in their ability to earn the target compensation.
A pay mix ratio of 0/100 might be preferable for some employers because it allows the employer to compensate sales employees after the employee has generated revenue. Employees would be compensated purely based on performance, and the employer would not need financial resources to pay sales employees in advance.
Variable compensation helps encourage salespeople to pursue the right business objectives, and push them to overachieve, but a pay mix ratio of 0/100 is not attractive (an “aggressive pay mix”) for employees who want financial stability. A balanced pay mix ratio is more likely to motivate and retain salespeople.
Most sales organizations set a pay mix ratio that includes a combination of fixed income and commission.
In software and SaaS industries, a pay mix ratio of 50/50 is common. A pay mix of 50/50 or 60/40 might suit Account Executives who have to be persuasive and consultative to acquire clients.
Pay Mix Ratio Factors
Several factors influence the pay mix ratio.
1. Performance Objectives:
Performance objectives are the sales performance management metrics sales reps aim to achieve. The learning curve for experienced candidates might be shorter than the learning curve for non-experienced candidates. New sales employees might need time to generate revenue, and a high base salary might be suitable until they meet performance milestones.
2. Knowledge, Experience and Education:
This factor helps understand the time it would take a new employee to learn and perform the job. It takes sales employees up to 3-5 years to achieve peak performance. Since tenured sales employees have proven experience, they will likely be comfortable with more variable pay.
3. Advertising Budget:
In companies that advertise heavily, the base salary might be higher because sales employees merely process orders and don’t have to provide significant consultation.
A high commission structure could be effective in companies that don’t advertise heavily because sales employees have to approach, persuade, and educate customers.
4. Length of Sales Cycle:
Sales cycles can be more than 12 months long in some industries or markets, and a high base salary can help sales employees sustain themselves financially. Financial security can also be achieved through recoverable or non-recoverable draws.
This factor evaluates the complexity of the employee’s responsibilities. It will include various considerations, such as:
- Are their duties standardized?
- How many departments and stakeholders do they need to work with?
- Do they need to create new strategies, methods, or products?
- Are there any targets or goals the employee is expected to reach?
6. Mental and Physical Demands:
This factor evaluates how challenging and stressful the employee’s responsibilities are.
Sales functions can be complex and difficult if you are selling to large government organizations. It may also require overtime work and significant time spent traveling.
Industrial factors can affect the pay mix ratio. For example, you might be at a disadvantage if your competitors offer a higher base pay than you.
The economic situation of your country can affect employment opportunities. Recession or pandemics might cause employees to accept a low base salary in order to secure a job.
Management should carefully decide which incentive compensation approaches to implement. The commission structure and pay mix ratio should be easy to communicate, explain, administer and govern.
Employees’ goals should be achievable and clearly defined. Employees must have control over their performance, so work with them to establish appropriate performance evaluation measures. Measure their performance and give feedback on it regularly and in a consistent format.
Once a sales compensation plan is set, business limitations and low agility often mean it won’t fundamentally change for several years or more.
One of my clients recently hired a new CEO who wanted every sales role to have a pay mix of 60/40 or lower. It is difficult to change overnight, given that most of the roles were paid at a pay mix of 80/20 or higher. And many of the roles were account management roles which were pretty close to 80/20 in the market anyway. My recommendation was not to ‘shock the monkey’ as Peter Gabriel would say, but gradually move into a lowered pay mix strategy over time.”Bob Malandruccolo – Principal, Sales Force Effectiveness Consulting
How to Set the Right Pay Mix Ratio
Set a pay mix ratio with a high commission component if:
- Sales employees have to pursue new accounts.
- The sales function is direct.
- The sales position requires a high degree of skill.
- The price of products is high.
- Internal career opportunities are limited.
Have a pax mix ratio with a high base salary component if:
- The sales function is indirect (dealers and distributors).
- The sales function is a collaborative team effort.
- The company is in an early or startup stage.
- The sales cycle is very long.
- Marketing activities play a strong factor.
- Internal career opportunities are easily available.
According to CSO Insights, in 2012, the average quota attainment percentage was 63%. It reduced to 53% by 2017. Only 55% of new sales employees are successful in a role, and only most organizations fail to meet their target attrition rate of 15%.
Pay mix ratios can help increase employee performance. A good pay mix ratio provides financial stability and motivates employees to reach the sales target and earn good commission.