Compensation professionals hear these refrains regularly, and for good reason, compensation plans should aim to attract (we don’t pay enough…), motivate and reward (our accelerator rates are too low), and retain (competitor ABC pays 40% more than we do). Therefore, “market competitive” in this context means building a compensation plan that accomplishes all three: it attracts top talent, it motivates and rewards top talent, and it retains top talent. But, there is one crucial caveat. The budget. Therefore, the comp professional is tasked with creating a compensation plan for all sales roles that attract top talent, motivate and reward, and retain that top talent while sticking to a budget (more about budget and how budget influences compensation design in Chapter 9).
Generally, companies will set their OTE ranges to be around the median of their defined market. Benchmarking lower or higher than the median is a business and financial decision. Other considerations include:
Total compensation package. If no equity or minimal fringe benefits are provided, setting OTE ranges higher than the median will help attract top talent.
Company brand. If your company is not well known in the space or is up-and-coming, higher OTE ranges may be necessary to attract the talent you need to grow.
Product & Service Complexity. If your company sells highly technical or complex products and services and requires talent with advanced degrees and/or training, then higher OTE ranges will be required.
There can be many reasons to set OTE ranges higher or lower than the median. The critical takeaway is contextualizing your company against the broader market to determine whether higher OTE ranges are needed for growth.
The critical consideration is to ensure that your budget is balanced across monies needed to (1) attract, (2) motivate and reward, and (3) retain.
Attracting top talent generally means offering competitive On-Target Earnings (OTE). Compensation professionals generally refer to OTE in ranges. For example, “the OTE for an Account Executive in New York is $120K to $160K.” Determining what is market-competitive is based on the role, level, and location.
The role may seem straightforward. After all, an Account Executive is an Account Exeuctive (AE). But not always. This is where segmentation (strategic elements), sales process, and role design (operational elements) factor. An AE assigned to SMB accounts may be a pure hunter (compensation on new logos). In contrast, an AE assigned to Enterprise or Strategic Accounts may focus on expansion (which is to say, hunting within their territory). These are different, and care should be given to benchmarking the SMB AE vs. the Enterprise AE.
Once the role is defined, the next step is to determine the right level to benchmark against. Your company may have three types of AEs: SMB AE, Mid-Market AE, and Enterprise AE. But how do these compare to the external data? How do you know you are looking at a data set for an SMB AE vs. an Enterprise AE?
In the career architecture below, the AE role would be aligned to the Professional Track (this would be determined in the first step, aligning the company role to the definition of the benchmarking data set). Here, the SMB AE may be a Grade 5, Entry, the Mid-Market AE a Grade 6, Developing 2, and the Enterprise AE may be a Grade 8, Advanced.
The reason the Enterprise AE skips Grade 7, Career is based solely on the type of AE the company needs in the role (Talent Strategy). For example, sales leaders may determine that an AE covering Enterprise Accounts needs at least ten years of experience. This ten years corresponds to the low range of “years of experience” that defines the attributes of a Grade 8, Advanced. In short, the company needs to determine the benchmarking level based on the years of experience required and the type of experience.
Figure 2, Sample Career Architecture (Source: Radford)
The last data point is location. While determining OTE for an SMB AE in New York vs. Chicago vs. Los Angeles may seem simple, there can be complexity when determining ranges. In Figure 3 below, there are differences across what an SMB AE is paid at the 50th percentile of the market. For example, New York is $150K, while San Francisco is $155K. Does this mean we have two separate ranges? Some companies do adopt a 1:1 model where they have a range that is unique for each city. Other companies adopt a 1:M model where they group cities based on the benchmark results that fall within +/- 5%. There is no right or wrong answer. Ultimately, it is a business decision that weighs pinpoint accuracy against the increased administrative burden and time to benchmark each of those cities individually and maintain ranges across all relevant systems.
Figure 3, Illustrative Benchmarking Table
Compensation professionals will perform an actual pay analysis to determine how the company pays relative to its benchmark competitors. The exact pay can and does vary from the target pay (the target OTE range).
This means an AE joined the company because of a highly competitive $250K/year OTE; however, because of aggressive quota setting (quota and territory), poorly designed sales process (Sales Process and Systems & Tools), and inferior products (Product Strategy), this once high performing AE is unable to meet their quota.
Another scenario is the budget over-indexed on attracting employees, and the compensation team had less money to design comp plans with aggressive accelerators. The high-performing AE achieves 150% of their quota but receives far less than s/he would have at their previous company due to low accelerator rates.
The ability to motivate and reward reps is a deficiency with the comp plan itself but generally, the root cause concerns areas outside of compensation. For example, Sales & CxO Leadership mandates on attracting top talent with top salaries means less money to reward top performers or more perniciously compensation professionals need to create a comp plan that creates considerable disparity between middle and top performers, which results in high salesforce turnover.
Territory Planning and Quota Setting are often the main culprits. If territories or the book of business is too large (this indicates poor capacity planning) and/or quotas are unrealistic of the opportunity within the territory or the book of business. Then the best rep will only make somewhere between their base pay and OTE.
Often, sales compensation professionals are tasked with “improving” the comp plan by offering better incentives or finding a way to pay people more. While options exist for comp professionals to “course correct,” these are stop-gaps. Identifying the upstream root causes will address the issue and prevent its recurrence.
The same challenges that apply to motive and reward also apply to retention; however, retention challenges are broader than the compensation plan. For example, the company’s approach toward promotion (Talent Strategy) or whether merit increases and equity refreshes are competitive (Budget & Financial). Still other areas can be those pain points around quota setting, accelerator rates, etc.
Other lesser-discussed culprits impacting retention are the Sales Process, Systems & Tools, and Dashboards.
Sales Process. Companies should review their sales process annually and more regularly as part of their Systems & Tools team to determine new tools that will need to fit into the tech stack and how those will impact the sales process. Often, new tools are introduced with poor adoption, and reps need to create their own workarounds or, worse, input data manually for RevOps and SalesOps teams. Reps become frustrated when 25% of their time is spent on admin activities or on activities that can be automated.
Systems & Tools. The company can either have too few tools, too many tools, or just the right amount of tools, but they are not architected in a user-friendly way. Regardless of the scenario, this is problematic for high-performing reps. Too few tools and too many admin responsibilities mean reps become frustrated. Too many tools that provide only marginal benefit in terms of productivity but cost too much time regarding training, enhancements, system interoperability issues, etc., are also frustrating.
Dashboards. Lack of visibility into the rep’s book, share of wallet, and other helpful factors means reps have little line of sight into how they will achieve their quota. Long refresh lags mean reps often do not have real-time data to pivot their strategy. If a rep does not have visibility into how they are pacing, then they generally do not have visibility into their compensation, and lack of compensation transparency, insights, and dashboards is a point of frustration for sales and sales leaders.
Retaining high-performing reps requires more than a well-designed comp plan. Other factors, like poor quota setting, too many admin responsibilities, insufficient visibility into pacing, etc., all contribute to regrettable turnover.