Setting compensation for salespeople involves a careful balance of competing interests. Employers want to drive sales while keeping their costs as low as possible—motivations that favor incentive-based compensation plans. Though employees want to be rewarded for their efforts, they also want reliable incomes—desires that favor compensation schemes weighted toward salary.
As Anne Coughlan, a professor of marketing at the Kellogg School of Management, reports in a new study, setting the right pay level (total compensation) and pay structure (amounts from fixed salary and incentive pay) for sales professionals is no simple matter. Job challenge, employer and employee taxes, cost of living and other factors also come into play.
In fact, Coughlan and colleagues Dominique Rouziès, a professor at HEC Paris, Dawn Iacobucci, a professor at Vanderbilt University, and the late Erin Anderson, a professor at INSEAD, find that there is no single “best” compensation plan. Their examination of salesperson and sales manager compensation in five European countries reveals that optimal pay levels and pay structures vary in response to two important and conflicting pressures: the need to reward better performers with higher pay, and the need to manage the impact of local taxes on the pay differential between high and low performers.
Striking the right balance is even more complex for multinational employers with sales forces that span the globe. Before settling on a particular pay structure, they must take into consideration the impacts of tax schemes in individual countries. Multinational firms “need to have an international point of view and be locally sensitive to the conditions their employees work in,” she says.
There is no single “best” compensation plan.
Coughlan’s study focused on compensation of salespeople and sales managers in the business-to-business (B2B) sector. Her data included 14,000 salesperson roles in France, Germany, Italy, the Netherlands, and the United Kingdom, and 4,000 sales manager roles in the same countries, with the exception of Italy. Industries represented included consumer goods, financial services, industrial goods, and trade.
The data, obtained from the Hay Group—the world’s largest compensation consulting firm—contained information on pay level and compensation, including the amounts of fixed pay (salary) and variable pay (bonus or commission) earned by salespeople and sales managers. Take-home pay was determined by adjusting income to account for social taxes by income bracket and country; employers’ payroll tax burdens also were calculated. Additionally, cost of living was taken into account. Jobs were rated based on the challenges they posed in terms of the know-how and problem-solving skills required to perform them, and the degree of accountability associated with the job.
Coughlan notes her study differs from most previous research on salesperson compensation in four important ways. First, most studies use seniority as a proxy for job challenge, which Coughlan was able to obtain directly from her data. It is an important distinction because a sales force’s most senior employees are not necessarily its highest performers. Second, the dataset includes information about individual sales people in specific jobs, which enables job-specific insights not possible in studies that rely on aggregate sales force data. Third, Coughlan looked at compensation schemes across international borders while most research on the subject is focused on the United States. Coughlan noted that a multinational study permits the analysis of taxation effects and cost-of-living variations across countries, unlike single-country studies. Fourth, Coughlan’s study includes sales managers as well as field salespeople, stating she is unaware of any empirical study of sales manager compensation.
Higher Taxes, More Incentives
Coughlan’s analysis yields two key findings. First, her research shows that taxes—employer payroll taxes and employee income taxes—have a profound impact on pay levels and structure. In countries with burdensome tax schemes, Coughlan found that employers tend to rely more heavily on incentive-based compensation. Coughlan explains that salespeople in high-tax countries may be reluctant to work harder because their post-tax paycheck will not reflect their effort; high taxes compress the differential between high and low performers. Employers can overcome this reluctance by decreasing salary and boosting incentive pay, Coughlan says. Employers have another motivation to use this strategy. By putting a greater emphasis on variable pay, employers generate high payroll taxes only when employees produce sales.
The impact of payroll taxes on employers’ behavior is “an interesting finding,” Coughlan observes. If she had not done the research, “it would not have sprung to my mind as a factor to take into account,” she says.
To illustrate the effect, Coughlan compared the pay structure of industrial goods salespeople in France and the United Kingdom. For a salesperson earning €50,000 a year, the ratio of incentive pay to fixed pay was 20 percent for the French salesperson compared to 11 percent for the salesperson in the United Kingdom, where taxes are lower.
Coughlan’s second key finding involves sales manager compensation. She discovered that sales managers, but not salespeople, are compensated at increasingly higher rates as their jobs become more challenging. Coughlan says this can be explained by a multiplier effect: the performance of a sales manager is multiplied through the performance of salespeople. Put another way, a bad salesperson may lose a few sales, while a bad sales manager “may negatively affect dozens or hundreds of salespeople,” Coughlan and colleagues wrote.
Coughlan says there is a message for salespeople in her finding: As the job evolves from consultative, value-added selling to that of a senior relationship manager, a salesperson is financially better off becoming a sales manager. In the consumer goods industry, Coughlan notes in her paper, take-home pay is 11 percent higher for a sales manager than for a salesperson whose job poses comparable challenges.
Coughlan’s research also revealed that employers rely less on incentive pay to reward their most valuable salespeople and sales managers versus average sales professionals. Top performers are hard to replace, so employers want to keep them happy with a higher base salary. At the same time, Coughlan found, no sales professional can achieve the highest levels of take-home pay on salary alone. Volatility, it seems, is one price of a higher income.
Coughlan says the report may help employers design better compensation plans; nearly 60 percent of them are dissatisfied with their existing programs, according to one survey. American companies, she says, should think twice about imposing their U.S. sales compensation program on their more heavily taxed European sales professionals.
This paper won the 2010 Excellence in Research Award from the Selling and Sales Management Special Interest Group of the American Marketing Association.