What is Total Target Compensation?
June 25, 2020
What is Total Target Compensation?
Total Target Compensation (TTC) refers to the total amount of pay that a role will earn for 100% achievement of expected results. This encompasses both fixed and variable compensation, including base pay/salary, bonuses, short-term incentives, and commissions. It is not the maximum remuneration for the role but rather the expected earnings for meeting the performance expectations for the role. The person in the role could earn less (down to the level of fixed or base salary) or more for over achievement of sales targets.
The ratio of different compensation types is referred to as pay mix, where base (or fixed) and incentive (or variable) pay are communicated as shares of the TTC. For example, a 70/30 pay mix would describe compensation made up of 70 percent fixed pay and 30 percent variable pay.
Benefits of Total Target Compensation
Some of the benefits of using TTC to set pay expectations include:
- Defining performance expectations and payouts for achievement
- Providing a market rate for the position that incorporates fixed and variable pay
- Communicating the competitive rate for the market when recruiting salespeople
- Having an internal benchmark for comparison against market data
However, one disadvantage of using TTC to set pay expectations is that if targets are not realistic, neither is the TTC. Therefore, it is important to have clear and methodical calculations for both targets and TTC. Factors that influence TTC include:
- Budgets: What is the maximum amount your company can afford to compensate roles?
- Mix/Equity of Treatment: Are you paying the role a fair salary based on the nature and expectations of the role? What is the pay at risk (meaning the portion of variable compensation at risk of not being paid out)? Is it consistent with the role?
- Responsibilities: What responsibilities does the role have? What’s the volume of sales that is expected for the role? How many accounts will the role manage? Are there recurring revenues?
What Influences the Impact of Total Target Compensation?
While TTC isn’t the only influencer, it’s a major influencer. So what determines the impact of TTC?
Pay mix. As mentioned above, pay mix can greatly influence just how much one is motivated by their compensation plan. In other words, the greater the variable pay, the more likely one is driven to perform and sell. An aggressive pay mix with more emphasis on variable pay (.e.g. 50/50) may be more appropriate for companies seeking growth or with sales hunter roles, while a higher base and lower variable pay mix (e.g.80/20) may be more appropriate for companies focused on customer retention.
Clear communication. Even with a motivating plan and favorable pay mix, performance expectations must be clearly communicated. When a salesperson is unclear on expectations, they may act in opposition to the sales compensation plan intention. Likewise, a complex plan with contradictory rules can prevent a plan from driving the intended behavior and results. There must be an avenue for ongoing communication and feedback to give clear direction to salespeople regarding their compensation.
Transparent reporting. Another facet of clear communication is having accessible reporting, providing salespeople with performance and pay visibility. Performance reporting needs to be transparent and pertinent to promulgate the desired sales behavior and culture. Sales Performance Management (SPM) technology is an effective tool to give salespeople accurate and real-time updates on performance and payouts.
Fair distribution of opportunities. Even the most driven and determined sales person won’t fully reach their potential when faced with poor territory alignment and quota setting. Opportunities should be fairly distributed and perceived as fairly distributed to motivate the sales team.
Effective performance management. Sales managers need to deliver effective performance management in a style consistent with the company culture as effective coaching and mentoring can contribute significantly to performance. Additionally, growth opportunities, team culture, and personal recognition can all have an impact on leveraging TTC.
In the end, don’t settle for the “as long as they’re getting paid, they must be happy” attitude. It’s crucial to truly understand what motivates and drives your sales force, as well as what the sales strategy demands in terms of their behaviors.
How do You Know Which Levers to Pull?
In a few words, sufficient scenario modeling! Don’t just pile on the plan design features without fully thinking through the different scenarios in which those features will be tested. Sufficient modeling highlights desired outcomes and can provide alignment and clarity that increases sales engagement. On the other hand, a lack of stakeholder input, modeling, and ‘what if’ scenario testing can undermine sales performance. The key is to talk with salespeople and have an understanding of competitive market rates to have the best TTC offer to attract and keep top talent.
For more on best-in-class sales compensation plan design, watch the Designing High Performance Sales Compensation Plans webinar from design experts Jon Clark and Dave Johnston.