A compensation analysis is the process of reviewing and evaluating the compensation practices across an organization, including salaries, benefits, bonuses, and performance-based pay. The purpose of compensation analysis is to ensure that compensation is not only fair and competitive, but also aligned with the organization’s broader goals and objectives.
Regular compensation analyses are essential for organizations to ensure their pay always remains appropriate. But it’s especially important for sales organizations using incentive compensation, as their comp plans directly impact the performance of their sales teams.
In this article, we’ll examine:
- The key benefits of compensation analysis across the board
- Why it’s especially crucial for incentive compensation
- How to conduct a compensation analysis.
Benefits of compensation analysis
A well-structured compensation plan is essential for ensuring employees are fairly and competitively compensated, and that fair compensation comes with a number of other advantages. Here are some of the key benefits to conducting regular compensation analyses.
Attracting and retaining talent
In a competitive job market, organizations need to be able to stand out from the crowd and offer compelling reasons for job seekers to choose them over other options. And offering a compelling compensation package is one of the surest ways an organization can achieve this. According to research from Gallup, an increase in income or benefits ranked as the number one most important factor job seekers consider when looking for a new position.
Similarly, once hired, employees need strong incentives to stay long-term. For sales in particular, voluntary rep turnover sits at 15.9 percent, with the average cost to hire and train a new sales rep being around $150,000. This means it’s far more cost effective to keep the talent you have than to continually cycle through new employees.
Compensation analysis helps you ensure that the compensation you offer is in line with or better than market averages, which helps you find and keep the best talent.
Ensuring employee satisfaction and engagement
Insufficient pay not only leads to high turnover, but it also contributes to growing dissatisfaction and poor morale among employees who stay. It’s important for employees to feel valued and taken care of by the organizations they work for, and that they aren’t constantly worrying about how they’re going to make ends meet.
Research has continually found that employees who are paid better perform better. It improves their health and wellbeing, their engagement with their work, and their ability to perform their tasks effectively. Compensation analysis makes sure that employees aren’t being held back by insufficient pay.
Avoiding overcompensation
On the one hand, organizations need to ensure that they’re always providing enough compensation for their employees. But on the other hand, they also don’t want to be wasteful with their expenditures, paying far more than is appropriate for given roles or activities.
In addition to losing money, overpaying could actually have a negative impact by disincentivising additional performance, removing the motivation for advancement, or stoking feelings of resentment when certain positions are unfairly compensated compared to others.
Compensation analysis identifies the most appropriate compensation levels for all positions, ensuring that no one is under- or overpaid and that pay is equitable across the organization.
Complying with regulations
Organizations are subject to a number of different legal requirements and regulations surrounding compensation. They’ll vary depending on where the organization does business, but common examples include:
- The U.S. Equal Pay Act: mandating equal compensation for similar work regardless of gender
- The Fair Labor Standards Act (FLSA): governing minimum wage, overtime pay, and exempt/non-exempt classifications for employees
- Treaty on the Functioning of the European Union (Article 157): mandating equal pay for equal work
- EU Directive 2023/970: strengthening the enforcement of equal pay and salary transparency
- Directive on Adequate Minimum Wages (2022/2041): establishing guidelines for fair minimum wages across the EU
Compensation analysis verifies that all of the organization’s compensation practices comply with legal requirements, avoiding potential penalties or fees.
Why incentive compensation analysis is so important
Although compensation analysis is important for all kinds of organizations, sales organizations using incentive compensation plans have more at stake than most. Here’s why.
Boosting sales performance
As mentioned earlier, providing adequate compensation is important for the performance and productivity of any role. But with sales, the incentive compensation is tied far more directly to each sales rep’s performance.
When structured properly, incentive compensation rewards performance by compensating reps for making sales or completing revenue-generating sales activities. The better their performance, the greater their pay. But a poorly structured incentive compensation plan can have the opposite effect.
If, for example, the base pay is set too high relative to variable pay, then it can cause complacency and demotivate sales reps from putting in their best performance. But if the plan is overly reliant on variable pay, then it can cause undue stress on employees, causing their performance to suffer.
Compensation analysis looks at the plan holistically, ensuring that each part works together to motivate optimal performance.
Incentivising the right activities
A poorly structured compensation plan runs the risk of incentivizing the wrong activities. For example, plans that place too much emphasis on completing sales and not enough emphasis on quality can lead to higher customer churn. Or plans may over-incentivize specific activities, like placing outbound calls, which could lead to a high number of calls being made to poor quality leads that don’t generate revenue, just so sales reps can acquire their incentives.
The ideal incentive compensation plan offers appropriate and balanced incentives for sales activities that generate revenue and are aligned with broader organizational objectives. And a compensation analysis can help sales leaders identify which activities are worth incentivising.
Identifying pay discrepancies
Large sales organizations typically have sales teams spread across numerous regions, product lines, industries, and/or account sizes. And because these teams are operating in different contexts, they’ll usually have different compensation plans tailored to their unique requirements.
But it’s important to ensure no team has an unfair advantage over others. Sales reps should have comparable opportunities for earnings and advancement regardless of which team they’re working in. Otherwise, you’ll breed resentment across the organization, damaging company culture and harming morale.
Compensation analysis verifies that all positions are fairly compensated, examining each role in its specific context and identifying pay discrepancies that need to be addressed.
How to conduct a compensation analysis in five steps
Compensation analysis involves making data-driven decisions to align compensation with business goals, market conditions, and employee expectations. This process involves several critical steps, from setting objectives to monitoring long-term effectiveness. Here’s how to do it.
1. Define goals and objectives
The first step in conducting a compensation analysis is to define the goals and objectives of the analysis. Knowing the purpose of the analysis will guide how you approach the rest of the process.
Identify what your organization hopes to achieve through the analysis, such as attracting top talent, ensuring pay equity, improving employee satisfaction, or aligning compensation practices with strategic goals.
You should also determine which job roles will be included in the analysis. It could be a wide-ranging analysis that covers the entire organization, or be a more focused analysis that hones in on specific roles.
2. Collect data
Gathering and organizing relevant data is essential for an accurate and comprehensive compensation analysis. This involves collecting internal data, like current compensation plans, job descriptions, and sales performance records, as well as external data, like industry standards, market rates, and competitor compensation practices.
It’s critical to ensure that all data is accurate, reliable, up-to-date, and well organized. This can be difficult to achieve by manually pulling from scattered spreadsheets and various systems. And if your data isn’t accurate, your compensation analysis won’t be accurate either, which could lead to serious problems.
The best way to organize your data is with a centralized system like Performio’s Incentive Compensation Management (ICM) software. Performio tracks and manages all of your sales data in real time, so you’ll always have the most accurate and up-to-date information at your fingertips. And it seamlessly integrates with all the other major systems you’ll be pulling data from, allowing you to see everything you’ll need to reference in the same place.
3. Analyze the data
The next step is to analyze the data you’ve collected. Compare the compensation for each role against similar roles within your organization, as well as against industry benchmarks, to ensure that everything is fair, competitive, and equitable.
You’ll also want to look at the relationship between pay and performance, verifying that the more effort employees put in, the more they’re able to earn, while at the same time ensuring they aren’t over-incentivised for non-revenue generating activities that don’t contribute to organizational goals.
Effectively analyzing large volumes of sales data to identify trends, patterns, and discrepancies is nearly impossible to do manually. Thankfully, Performio comes with a world-class AI-powered Analytics Studio that makes it easy to analyze data, visualize results, and pull out actionable insights.
4. Update the compensation plan
Once your analysis is complete and has revealed any changes that need to be made, it’s time to update your compensation plan accordingly. This may involve adjusting the pay mix, OTE, quota, specific incentives, and/or benefits for any affected roles.
As you roll out the new compensation plan, it’s crucial to communicate the plan effectively. Develop a clear narrative for why the plan is changing that helps employees understand how they and the broader organization will benefit from the adjustments. And be sure to document the changes in a way they can easily reference and understand.
5. Monitor and review
Compensation analysis isn’t a one-time event, but an ongoing process. Once the new compensation plan is in place, you’ll need to carefully monitor its effectiveness. This includes tracking key metrics like employee turnover, satisfaction, and of course sales performance.
Regularly review the compensation plan to ensure it remains competitive and aligned with the organization’s goals. Depending on the nature of your organization, you may wish to conduct a new compensation analysis annually, every few years, or in response to major organizational changes or market shifts.
Analyze and update your compensation plan with Performio
Dedicated ICM software is essential for gathering accurate and reliable data, performing analyses, and adjusting incentive compensation plans. But ICM solutions are not all created equal. You not only need to identify areas for improvement, but you must also be able to quickly make changes to your compensation plan yourself—without having to wait weeks or even months for your ICM vendor to do it for you.
Performio’s ICM software puts everything you need at your fingertips, including instant access to all your data, in-depth AI-powered analytics, intuitive dashboards, advanced reporting, and the ability to fully take charge of your sales comp plan.
Want to see what Performio can do for your organization? Request a demo today.