Boost your Variable Compensation plan – Roland Massenet

Valuing People Based on Their Influence

Variable compensation must value individuals based on their influence on the desired outcome. This simple yet powerful definition illuminates the entire discussion around variable compensation. To value someone is to give them worth based on their needs. The fundamental difference between fixed and variable pay lies in the fact that fixed salary provides security to employees, while variable salary offers the hope of significant and exceptional earnings.

The Best Buy example perfectly illustrates this approach. Hubert Joly, who took over Best Buy in 2012 during a catastrophic situation, made the radical decision to eliminate all commissions for its 125,000 employees. Why? Because in an environment where Best Buy faces Amazon, which is waging a price war, the salesperson’s influence should not be basic selling, but rather guiding the customer in their technological considerations, ensuring customer security, and enhancing their personal comfort. A sales commission would go against good advice, as the salesperson would be tempted to quickly sell as many products as possible rather than taking the time to advise.

Fixed vs. Variable Balance

The question of “how much” variable pay depends on employee needs. Historically, it was thought that variable pay was solely for motivation and that highly motivated individuals should receive a lot of variable pay. However, if an employee needs more security, a higher fixed salary will be more motivating than the hope of larger gains. This is exactly what happened at Best Buy, where employees needed more security.

The Dell example shows another approach: entry-level salespeople were not compensated based on revenue, as Dell is a direct marketing machine. Marketing generates calls and website visits, and the salesperson’s talent lies in increasing the margin by showing the customer why they need a faster processor, a larger screen, or more RAM. At Dell, therefore, the margin was important, because that’s where the salesperson has influence.

Individual vs. Collective: Finding the Right Balance

The question of “how” leads to reflection on the balance between individual and collective compensation. There is an important distinction between two objectives of variable compensation: rewarding a specific performance by a salesperson that will accelerate the sales process, and involving all employees in the success and sharing of results.

The recent example of Nomination, a French company that provides prospecting files and processes, illustrates an interesting innovation: the company abandoned individual commissions for a collective compensation system where all commissions are pooled and then distributed among salespeople proportionally to each person’s expected contribution.

Several factors point towards individual compensation: the sale of commodities, a short sales cycle, a wide dispersion of performance, salesperson autonomy, and organizational size. Conversely, collective compensation is more suitable when conversions require information sharing, in project mode, during a significant pace of innovation, or to comply with certain regulations like MiFID II in banking and insurance.

Quantitative and Qualitative Criteria: Complementarity

The most commonly used quantitative criteria are, not surprisingly, revenue, volumes, margin (for 45% of plans), operational management criteria, and group financial indicators. Qualitative criteria are integrated into 62% of compensation plans.

The MMA Vie example illustrates a sophisticated approach: the variable compensation for life insurance advisors is broken down into three components: commissions on margin, commissions on arbitration, and performance bonuses with a modulator based on the achievement of qualitative objectives (customer satisfaction, percentage of deals closed with advice, acquisition of high-net-worth clients). If customer satisfaction is not good, this can severely penalize variable compensation.

Calculation Methods: Simplicity and Fairness

Three main calculation methods are identified: commissions (more common in the United States for their simplicity), performance bonuses (dominant in Europe for their fairness), and fixed-amount bonuses. A fourth method, developed by Intel and reinforced at Google, are OKRs (Objectives and Key Results), which allow for the customization of performance bonuses individually or by department.

Personalized performance bonuses require two essential prerequisites: the ability to objectively define quantifiable individual objectives, and a high level of managerial maturity to individually lead and coach employees on objectives that may differ.

Modulators: Preventing Misuse

Salespeople are extremely creative in optimizing their variable compensation. To prevent misuse, modulators are used: thresholds (ensuring an employee must achieve at least 80% of their objective), accelerators (rewarding performance beyond 100%), and regularity bonuses (rewarding salespeople who maintain consistent performance).

Modernizing Management: Digital for Transparency

Variable compensation is often a source of frustration, disputes, and even breakdowns. To make variable compensation a motivational tool again, digital technology provides valuable assistance by automating calculations, facilitating access to information, and enabling managers to take ownership of the subject to make it a true performance management tool.

The benefits of automation are threefold: reducing costs and saving time, boosting business by refocusing salespeople where they add value, and retaining talent by rebuilding trust with all teams.

In a nutshell…

Here are the key takeaways regarding variable compensation:

• Value Based on Influence: Variable compensation should value individuals based on their actual influence on the desired outcome, not necessarily on revenue.

• Adapt Fixed/Variable to Needs: An employee who needs security will be more motivated by a higher fixed salary than by the hope of significant variable gains.

• Find the Individual/Collective Balance: The balance depends on the context: sales cycle, project mode, pace of innovation, regulations.

• Combine Quantitative and Qualitative: Qualitative criteria such as customer satisfaction can significantly modulate variable compensation.

• Modernize with Digital: Automation and transparency enabled by digital technology transform variable compensation into a true performance management tool.

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