Creating an effective compensation plan for managers is a challenge for sales organizations. While compensation must be high enough to retain your best people, it’s important to remember that unlike individual contributors, a sales managers’ primary responsibility is to coach their team members. Therefore, the compensation plan needs to incentivize them to spend the majority of their time on management duties.
Sales managers are responsible for managing people and enabling team members to reach their full potential. Good managers offer advice and coaching as needed. If there is a problem with an impending deal or an existing customer, a manager will frequently step in to offer their expertise in navigating the situation. Typically, a sales manager supervises between five and ten sales team members.
Managers also assume responsibility for hiring and training new salespeople. The manager is usually the person who sets goals for individual contributors and the team. Oftentimes, they facilitate collaboration between the sales team and other departments within the organization, such as marketing and product development.
With this extensive list of responsibilities, it’s important to create a compensation plan that rewards managers for outstanding team performance. Here’s how:
1. Provide sales managers with a higher base salary.
Sales managers spend a lot of time on administrative tasks, in addition to coaching their team members. To incentivize them to devote enough time to these duties, it’s helpful to provide them with a higher base salary relative to on-target earnings (OTE). A base salary that’s between 60 and 70% of OTE is entirely appropriate for a sales manager, although this is on the high end for individual contributors.
2. Weigh the pros and cons of a threshold plan.
A threshold plan means that the manager’s variable pay doesn’t kick in until their entire team reaches specified milestones. Sometimes, the manager will receive greater incentives the more thresholds they meet.
In some circumstances, this makes sense. For businesses with an established sales process, incentivizing managers to meet pre-specified thresholds is reasonable and spurs them to motivate their team. However, if you’re still tinkering around with your process, or if the manager is responsible for overseeing a large number of inexperienced reps, this system doesn’t work as well. In such circumstances, a threshold plan can add more frustration to what is already a high-stress job.
3. For managers’ variable earnings, include individual sales commission, overriding commission, and bonuses.
There should be several components to managers’ variable earnings, reflecting job responsibilities. Managers should receive commissions on any sales they are responsible for as individuals. Additionally, they should get an overriding bonus on the entire team’s sales. This ensures that they’re focused on team performance.
Some organizations also implement bonuses for meeting quota or otherwise achieving notable milestones.
4. Consult sales performance data from your managers to create the plan.
When devising potential plans, plug in numbers from your managers. Evaluate how managers are compensated using this historical data. If this compensation plan were to be deployed, would it reward your strongest managers enough to keep them at your company? Tweak the plan until it works.
5. Contextualize sales manager earnings in comparison to individual contributor earnings.
Remember that managers will know everything about their team members’ compensation. No manager takes kindly to an average-performing team member making more than they are. Hence, managers’ compensation plan should be commensurate with their greater responsibilities and contributions.
This doesn’t necessarily mean the manager must make the most money. In sales, it’s a fact of life that top contributors may out-earn managers in certain circumstances. However, managers shouldn’t earn less than middle-tier individual contributors.
6. Offer managers stock options as an incentive.
Managers with equity have a stake in the company’s overall performance in the long run. They also have reason to stay until their stock options vest.
Although you may choose to offer stock options to individual contributors as well, managers should be offered more to reflect their greater stake in the company.
7. Consider a gainsharing plan.
Like stock options, gainsharing encourages teamwork. A gainsharing plan rewards the manager (and the rest of the time) for exceeding baseline expectations. These bonuses are typically awarded on either a quarterly or annual basis, to avoid the relative volatility of month-by-month sales.
Gainsharing is different from profit sharing in that it encourages growth based on previous performance. Profit sharing, while useful in some circumstances, doesn’t specifically address business growth in the same way.
8. Create a plan that’s easy for managers to understand.
The primary purpose of a compensation plan is to incentivize managers to prioritize activities that generate revenue for their team. If the plan is overly complicated, it doesn’t achieve that purpose.
Generally, the compensation plan explanation should fit on a single page. Don’t introduce so many factors that it becomes incomprehensible.
Example of a sales manager compensation plan
Here’s an example of what a sales manager compensation plan might look like. In this example, the manager is responsible for overseeing eight sales reps. We’ve used nice round numbers for simplicity’s sake.
In this model, a manager who met both individual and team quotas every quarter would receive a $6000 bonus annually. If this same manager averaged $275,000 in sales per quarter, they would make $2,500 in quotas (or $10,000 annually). Let’s say that this manager’s team averaged $2,100,000 in revenue every quarter, which would equal $5,000 in overriding bonus per quarter, or $20,000 annually. That equals $36,000 in variable earnings—which exceeds the $30,000 OTE but is appropriate for the high-performing, quota-exceeding manager in this example.