The 2005 Compensation Survey

There's no denying that business is looking up. After all, the economic recovery signs are there: Of the nearly 3,000 respondents to this year's compensation survey, 73 percent saw higher corporate revenues, 75 percent increased quotas, and 39 percent increased headcount.

Granted, many of these increases were on the modest side. But they represent a renewed—if tempered—confidence in growth moving forward. Managers have been doing more business, often with the same number of people. So performance is literally paying off, with 62 percent of sales teams' total compensation increasing.

While this is all good news, smart managers know that they can't afford to rest on their laurels. "Business and growth are getting better, but [this isn't a case of] unbridled optimism," says Bob Davenport, vice president of sales force effectiveness at Hay Group, a management consulting firm based in Philadelphia. "Executives are still cautious. They realize they were a little too optimistic a few years ago because they were waiting for a big turnaround," he says. "Now they've gotten used to the market and are more realistic." Managers are more on target with their goals and have developed contingency plans to adjust to market fluctuations—the response to lessons learned over the past few years. "It only takes one event to turn the market on its ear," says Kerry Chou, practice leader at WorldAtWork, a human resources association based in Scottsdale, Arizona.

Despite the caution, business continues to inch upward, as does the quest to cultivate higher productivity and reward with bigger paychecks. "Managers are skewing the pay mix," says Dan Moynihan, principal at Compensation Resources Inc., a compensation-consulting firm based in Upper Saddle River, New Jersey. "If there is performance, they pay more; if not, they don't. There is more risk put into compensation plans and slowed growth for fixed pay. This strategy develops more sales stars because [it boosts] motivation."

It is this approach that weeds out the low performers—and lets your stars shine. What happened during the hiring boom of the late 1990s was that "too many reps learned how to sell when the economy was great, and they were basically order takers," Moynihan says. "Then the economy shifted and [managers found out] that some of their salespeople never really learned how to sell." Executives have had to weed out the weaker performers as a result, and get more out of the team they already had. Though 39 percent of respondents hired more in 2004, a higher number, 45 percent, kept workforce numbers level. At the same time, 49 percent will keep headcounts the same in 2005, a sign that managers will continue to expect more productivity out of the same number of people. "[Executives] got burned by the expansion of the economy and the dot-com boom," Davenport says. "They are trying to raise productivity per person because adding people equals cost. Doing more with less is obvious in this climate.

"Meanwhile, executives continue to see their compensation grow: Total compensation increased for 60 percent of executives, according to the survey. And 45 percent saw their bonuses increase; 47 percent of that group saw them increase by up to 25 percent. Looking ahead, executives are counting on even better times, with 71 percent expecting an increase in total compensation in 2005.

The following pages highlight the 2004 compensation data for executives and their staffs, the continued high expectations for economic recovery in sales; trends and data in headcounts, quotas, and bonus projections; and the importance of using incentives when salespeople reach their goals. Respondents were asked to provide their own compensation information along with that of their top, mid-, and low-level performers.

Read on to benchmark your pay and that of your team.

Winning Combination

Everyone knows that cash is king when it comes to incentives, but is money all that executives and salespeople want when it comes to motivation? Not quite. "Some people are motivated by winning—not only cash," Compensation Resources' Moynihan says. "There is more interest in noncash prizes, such as trips and TVs, because they hold a certain value and they can be flaunted." The use of trips as incentives, for instance, seems to be on the rise as the years pass since September 11, 2001. In fact, this year 27 percent of respondents say they use trips as an incentive.

In addition, many employees value peer recognition, as Greg O'Brien, vice president of County Electric Supply, an electrical wholesaler based in Lansdale, Pennsylvania, can attest to. "For our inside sales force the incentive is a combination of salary increases, recognition, and position advancement," he says. "Recognition is more important for the inside salespeople, because they are still looking to grow in the company. But overall the goal of peer recognition is a simple one."

Alok Gupta, sales director at Lucent Technologies, a communications development company based in Murray Hill, New Jersey, says his company uses both cash and recognition as incentives. "We give the team kudos and make announcements in team meetings [for top performers]," he says. "It makes them feel good" and motivated to do more.

Give Them a Say

The biggest challenge executives face, often, is retaining valuable team members. One way to do so is by keeping pay competitive. And respondents to our survey have risen to the challenge: 41 percent changed their plans in 2004—50 percent of whom changed the performance measures of these plans.

But another impressive retention strategy has been to seek buy-in from team members. To that end, 64 percent of respondents solicited input for their compensation plans from their sales teams last year. It's a strategy, experts say, that makes salespeople feel they are important contributors, not just cogs in the wheel. "Salespeople are out there in the field so they know [what they can hit in terms of quotas]," WorldAtWork's Chou says. "The more they're involved, the better. It gives salespeople a sense of ownership. It's detrimental for managers to go into a secret room and come out with quotas that are out of this world." Most of the input managers solicit from salespeople is either suggestions for incentives (79 percent) or suggestions for quotas (61 percent). As for the 36 percent of managers who don't seek input, "Shame on them!" Hay Group's Davenport says. "[Getting a say from your salespeople] is the most important thing managers can do, and these thirty-six percent are shortsighted," he says. "It's critical to find out what's working and what's not working." Giving salespeople a say in the development of their comp plans also helps performance in the long run. "Our main focus is to have the salespeople act as if they own the business," says Rick Cheatham, sales director for Avery Dennison, an adhesive manufacturer based in Pasadena, California. "If we have them involved in forecasting it makes a big difference in the way they [perform] their role in the company."

A danger in making significant changes to compensation plans every year or making them difficult to understand is that "salespeople won't know what they are being paid, and it's important for them to know," Compensation Resources' Moynihan says. "The comp plan should pass the 'elevator test': A salesperson should be able to figure out how much he has made after closing a deal in the time between he leaves his office and gets to the lobby."

Looking Ahead

Though executives are projecting more increases that are largely modest, they can't help but be optimistic about 2005. "Forty-two percent stated quotas will go up eleven to thirty percent, which is significant," WorldAtWork's Chou says. "It's important because salespeople are cognizant of quotas. You don't raise them year over year if they don't think they could hit them." Seventy-five percent of respondents plan to increase quotas, in fact, while 47 percent plan on increasing headcounts, 12 percent of whom will increase staff by more than 30 percent. Eighty percent of respondents project revenues to increase by up to 50 percent, and 71 percent expect their own total compensation to increase in 2005, with 66 percent expecting increases up to 25 percent. Pay for performance indeed.