What is Pay Mix?
November 14, 2019
Pay Mix Definition
Pay mix is the ratio of fixed pay to variable pay in a salesperson’s compensation. It’s represented as a percentage split of total target compensation (TTC), with the first number representing base salary, and the second the target incentive amount.
How to set pay mix
The two numbers represented by pay mix (fixed and variable pay) will always equal 100% when added together. So, to establish a pay mix, you simply need to determine how much of a salesperson’s TTC will be made up of fixed pay (say 80%) and how much will be made up of variable pay (20%, in this case).
Pay mix varies by job content, and as a general rule, the greater influence the salesperson has on the sale, the greater the variable component (and the less guaranteed base salary).
For example, with a Strategic Account Manager’s commission, their pay mix will reflect a “lower” relative influence—they handle the largest company accounts and manage the resources that help meet customer needs; therefore, their pay mix should be closer to 80/20 or 75/25.
What is an ideal compensation pay mix?
As shown above, it depends! While there are many options when it comes to setting a pay mix, every combination will have a different impact, meaning the ideal construct is really the one that will motivate your salesperson the most, while also still making sense for the given selling situation.
Different pay mix scenarios
Think about it—if you’re aiming for conservative sales behavior, you’ll probably want to set a pay mix of a higher fixed compensation and lower variable pay (like 80/20 in the example just mentioned). You’d also expect the same mix for account management in a more mature - and thus stable - selling environment.
In terms of impact, a salesperson with an 80/20 pay mix will probably be working towards proft margin, customer retention, and steady account growth. ROI in this scenario is driven by cost control. So, if the paymix is too aggressive (e.g. 50:50), the company may end up overpaying for sales.
On the other hand, young, emerging companies or brands with new product lines require more aggressive sales behavior, which would be shaped by lower fixed pay and a higher variable pay component—leading to a pay mix of something like 50/50. ROI here is measured in terms of revenue growth.
Then - at the other end of the spectrum - the higher the variable element, the more the sales role will be influenced by the comp plan. For example, in a 0/100 variable pay mix situation, the salesperson is completely dependent on their own personal performance to generate income.
All things considered, pay mix should match business goals. Generally, if the season’s main objective is to acquire new customers, pay mix should leverage higher commission rates. If instead, the goal is customer retention, the scales should be tipped towards base salary.
What else can impact pay mix?
Beyond company growth stage and product line maturity, some note that sales compensation also must fit within the “culture” of the country. Meaning, the degree of pay mix (money at risk) and the extent of teaming are often driven by societal sensibilities.
While the drivers for selling success are similar globally, there is typically variance in benchmark pay mixes by geography to reflect the local market. For example, US designs tend to have more aggressive pay mixes than Europe or some APAC markets. (More consistent are the aforementioned differences between roles – hunter vs. farmer roles and emerging vs. mature markets.)
Any final considerations?
No matter the system, remember this—by offering any amount of variable pay, you’re asking your salespeople to trust they are going to be paid what they’ve earned, and so at the same time, you’re opening yourself up to scrutiny.
Meaning, salespeople will be putting every paycheck under a microscope given the dramatic variability of their earnings from pay period to pay period. When sales are good, you can usually expect less of this shadow accounting activity, but when sales are slow, you can count on the sales team spending their most valuable resource, time, in tracking sales and comparing their expected payment to what they actually received.
Given all of this, it’s common for salespeople in organizations operating without automation and/or transparency into the commission tallying process to live by the adage “trust but verify.” Such a stance leads many to keep their own sales records and compute their own commissions “on the side.”
This practice indirectly signals a distrust of compensation managers, and can really only be avoided by an automated sales performance management system. Working on an automated platform - and off of manual spreadsheeting - will allow salespeople to get back to selling, rather than worrying whether or not their commissions are being paid accurately.
Pay mix is one piece of the puzzle
In the end, the total reward offering needs to cater for individual needs and priorities. It is often mistaken that sales people are only influenced by the incentive opportunity.
Depending on role and pay mix, they will also be influenced by career aspirations, development opportunity, team culture and personal recognition. It is of crucial importance to understand what drives your force, as well as what behaviors the strategy demands in order to maximize sales activities.