Leaders know that compensation plans play an important role in recruiting and retaining the best talent. But what these executives often don’t realize is that how they communicate about pay can be just as important.
We saw dramatic evidence of this in a study conducted by our sister program, CLC Compensation, which looked at sales compensation plans. The perceived fairness of pay had a 20 percent greater positive impact on sales representatives’ commitment to their jobs than their satisfaction with the pay amount itself. Sales executives, then, should focus less on the payouts themselves and much more on improving reps’ belief in the fairness of the process used to determine them. But how?
CLC Compensation found that of all compensation-related activities, those relating to communication are by far the most influential in driving perceptions of process fairness. Even the best designed pay systems will not motivate effectively if they aren’t properly communicated to reps. What’s more, the messenger matters as much as the message. Sales reps place significantly greater importance on pay communications from their direct manager than from any other source.
The frequency of managers’ communication also has a profound impact on reps’ perceptions. Manager-led discussions held two to five times per year can increase pay fairness perceptions by more than 70 percent relative to just one. In fact, the data shows that when managers have only one compensation discussion with reps per year, that “once-and-done” conversation actually drives negative perceptions of pay fairness, as reps tend to interpret infrequent communication as indicative of something suspicious about the compensation plan. And yet most organizations spend lavishly on consultants to redesign their compensation plans while completely ignoring the task of communicating those plans.
Doing this isn’t just expensive, it’s counterproductive. Firms that frequently redesign their plans don’t just risk sending mixed messages to their staff, they end up frustrating sales managers by significantly undermining their ability and willingness to discuss compensation with their teams. Frequent plan changes, in other words, hamstring the very people reps look to most for payment information.
As your sales reps settle into their new comp plans for 2011, it’s crucial to ask your managers whether they’re equipped to talk reps through those plans and if they’re committed to doing it more than once a year.
(Matthew Dixon is managing director of the Corporate Executive Board’s Sales and Service Practice. Brent Adamson is senior director of the Sales Executive Council, a division of the Sales and Service Practice.)
