Sales Compensation

‘The Great Compression’: Leaders discuss shrinking sales compensation ranges

By Divya Rachakonda, and Jason Brown

Oct. 9, 2022 | Article | 7-minute read

'The Great Compression': Leaders discuss shrinking sales compensation ranges


It’s long been a best practice for U.S. companies to pay the top 10% of their sellers between two and three times the company’s average variable pay. This target ratio—referred to as “leverage”—has been advised for decades. It was believed such differentiation was necessary to adequately reward and retain top performers and motivate average performers to excel. Bottom performers, meanwhile, were targeted to earn little, or in some cases none, of their incentive earnings.

 

However, compensation differences between top and bottom performers have narrowed in recent years, with many sales teams failing to meet leverage benchmarks. We reviewed sales pay benchmark data and found this phenomenon across a variety of sales roles and in many industries, including pharmaceuticals, financial services, hospitality and insurance. In fact, technology is the only industry where we did not see signs of pay compression.

 

Consider the pharmaceutical industry, where ZS has conducted sales compensation research studies for more than a decade. One way to study pay compression is to look at how much both the highest and lowest performers are paid. In 2017, three-quarters of all sales teams had at least one seller earning 250% of target incentives, as well as one earning half or less. We consider teams that have both of these types of sellers to be meeting the leverage benchmark. The percentage of sales teams meeting leverage benchmarks declined each year since 2017, reaching a low point in our most recent data set (see Figure 1). This trend of pay compression precedes the pandemic and has accelerated during it.

We spoke with sales leaders and total rewards professionals across industries to add perspective. “We used to have a strategy of using high leverage incentives, with significant upside above 100% to target and a steep downside below target,” said the vice president of sales operations and compensation planning for a 2,000-person B2B sales organization. “But most of our divisions moved to a one-for-one payout relationship below target because we found that new hires were no longer willing to tolerate multiple years of pay significantly below target while they strove for big over-target pay numbers.” By 2018, this leader’s company’s 25th percentile performers averaged 80% of their target earnings, while 90th percentile performers averaged 155%, a narrower pay distribution than in prior years.

 

After reviewing data encompassing hundreds of companies and incentive plans at thousands of U.S.-based sellers, we are convinced that sales variable pay differentiation is far narrower than historical leverage benchmarks. “The Great Compression” of sales pay distribution is real.

Why are we seeing compression in sales pay distribution?



We posed this question to industry leaders and ZS experts. Some suggested that pay assurances during the pandemic played an outsized role in their industries. A sales enablement executive from a Fortune 500 insurer told us: “Since 2020, we’ve been trying to respond to the economy and emerging worker mobility. People on the fringes of desired pay levels were at risk, and we were losing so many that it stunted growth. We changed our commissions to make it easier for people to survive in the role; to protect the middle.”

 

Still, others suggested that changing generational and seller preferences were a factor before 2020. They also said compression was the unintended consequence of new performance metrics and improved quota setting. “We haven’t intentionally reduced upside pay, but there may be a reduction,” one vice president told us. “Our target setting has improved, which brings down top-end earnings due to fewer outliers. We’ve also added market share metrics (to complement gross sales) that have made outlier performance harder to achieve.”

 

As we zoom out to look at incentive pay across industries, we have identified five main drivers for the Great Compression, listed from most immediate to the most lasting:

 

External pressures: COVID-19 disrupted sales, prompting many companies to install incentive protections. Then, companies began hiring aggressively, particularly for remote and hybrid sales roles, putting upward pressure on pay, especially in entry level sales positions. Competition for sales talent has led many companies to raise pay for below-average earners and accelerate earnings for early-tenure sellers, bringing the bottom-tier pay level closer to the average.

 

Operational improvements: Many companies have improved data quality and goal setting through new attribution and forecasting techniques. The ability to more accurately predict sales reduces the frequency of outlier performances.

 

New performance measures: We are seeing companies shift from compensating salespeople based only on revenue to considering more holistic measures of impact, ranging from customer experience to national performance outcomes. These added metrics often reduce pay variance, especially in cases where data quality is uncertain or qualitative assessments are used.

 

Structural change: Sales roles are also evolving. At many companies, sales has shifted from being the primary driver of customer acquisition and growth to being part of a broader team that includes complementary roles, multichannel marketing and artificial intelligence. In pharmaceuticals, for example, a portion of the observed compression appears to stem from the growth in new types of sales roles. While salespeople are still critical, their share of territory impact may be reduced, and compensation variance along with it.

 

Risk tolerance: ZS’s research on generational attitudes toward compensation shows that millennials will accept lower individual incentive upside in exchange for higher certainty in pay, along with a culture of teamwork and egalitarianism. New sellers may be driving changes in pay practices through the offers they accept, the results they deliver and the jobs they stick with.

 

Companies, too, have changed their risk tolerance. Many of the executives we spoke with had recently increased the monitoring of their incentive programs, in an effort to guard against the financial and reputational risks associated with outlier pay. For some, incentive pay that’s three times the average is not worth the added scrutiny and risk.

 

We surveyed more than a dozen ZS incentive practice leaders to better understand how these five drivers impacted companies and industries. No driver stood out above the others and each driver was cited as contributing meaningfully to the pay compression we observed. Interestingly, these experts speculated that operational improvements, along with metrics and structural changes, will be increasingly important moving forward. Evolution toward team-based selling, more comprehensive performance metrics and better quotas may suppress future pay differentiation.

What should leaders do in the face of this change?



The majority of our interviewees agreed the most important step leaders can take is to be intentional when designing their incentive pay structure. It’s critical to be transparent about planned pay distribution and sales earning potential, and to measure progress against that plan and adapt incentives until the plan is met. We recommend telling your sellers about the company’s intentions for top and bottom pay levels, while explaining how these levels align with your desired sales culture. If a company fails to do this, they run the risk of setting false expectations, which can sow dissatisfaction, drive turnover and dampen results.

 

Several interviewees asked if they should be concerned if pay compression persists. We think not, as these oft-cited benchmarks could be outdated. There are many ways to manage incentives, after all. One is to spread out pay, which would push some salespeople to the highest levels and manage turnover among bottom performers. Tech companies may serve as an example, as they appear to have held firm to high leverage sales incentive plans and attracted talent as a result. This high leverage approach works great for some companies and cultures, but an alternative structure could be designed so that most sellers hit their goal most years, with average pay a bit above target and pay spread less leveraged. This will likely result in a positive, consistent sales team—though performance management will be needed to protect against complacency.

 

Whatever the future holds, we recommend staking out a position that fits your culture and sales strategy, and then executing it. Focus on aligning your incentives to your company, rather than chasing trends. As the president of a leading retirement company asked: “Is it more important for new generations of employees to have enough versus have the most? I wonder if we are in an unusual moment versus the emergence of new and lasting trends? Who knows?”


This article includes contributions from ZS’s Chad Albrecht, Mike Francis and Shivani Jindal.

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