In this article, I'll describe what a typical sales manager compensation plan looks like. I’ll also highlight the 7 steps needed to build your own plan. These include determining on-target earnings (OTE), deciding KPIs, identifying the pay mix, considering thresholds, considering equity, gainsharing, and vetting for legal compliance. Lastly, I’ll share 4 tips that you can refer to while creating your plan: don’t overcomplicate things, leverage historical data, review and revise often, and use automation software.
If selling is a team game, then a sales manager is the team coach.
A sales manager trains reps, monitor performances, set individual goals, motivate their crew when the chips are down, and a lot more. Phew!
That’s why you need to find the right person and ensure that the offered compensation is on point. Because the last thing you want is to lose a great managerial prospect to a substandard comp plan.
And this article can help you avoid that.
Below, you’ll find a step-by-step process to create a winning compensation plan for sales managers. You’ll also find some tips you can follow to draft an effective plan.
Let’s get started.
What is a Sales Manager’s Compensation Plan?
A sales manager’s compensation plan outlines how much total salary they stand to earn in a year if they hit all their targets. This total salary is known as On-Target Earnings (OTE), and includes fixed and variable components.
Here’s what the compensation plan of a sales manager at a SaaS firm might look like:
- OTE - $200,000
- Pay mix - 60:40
This means the manager will earn a base salary of $120,000 per year (60% of $200k), and $80,000 (40% of $200k) in commissions if they hit 100% of their quota.
How to Build a Winning Sales Manager Compensation Plan
Follow the 7 steps below and you’ll be well on your way to building a truly great comp plan for your sales managers:
Step 1: Determine on-target earnings (OTE)
To determine your sales manager’s OTE it’s generally a good idea to look at what your competitors are offering their sales managers.
Why?
Because, more often than not, a sales manager applying for a job at your firm will also be considering other firms like yours. And if the OTE you offer is significantly lower than your competitors, you’ll be doing yourself a huge disservice.
Step 2: Decide KPIs
Setting KPIs that align with your business goals can you drive the right behaviors from your sales managers.
Some common business goals include:
- Reducing churn, i.e. better customer retention.
- Increased booking volume.
- Improving lead conversion rates.
- Higher MRR (Monthly Recurring Revenue).
- Shorter sales cycles, i.e. closing deals faster.
- More referrals from existing clients.
Step 3: Identify the pay mix
As a general rule of thumb, manager pay mix ratios are not as aggressive as those for reps, and tend to lean more toward a higher base pay.
Why?
Sales managers handle a myriad of crucial tasks such as motivating and coaching sales reps, strategizing, closing deals, etc. That’s why their comp plans must reflect these varied responsibilities that aren’t always quota-driven.
That said, you want to keep things interesting enough for your sales manager to push their reps to sell aggressively.
Step 4: Consider adding a threshold
In the spirit of keeping things interesting for your sales manager, you could also consider adding thresholds to their comp plan.
What’s a threshold?
A threshold means your manager’s variable component will only kick in when their team achieves certain pre-established milestones.
So, if Josh, a team leader of 6 reps, is set to earn $80,000 as commission, with $20,000 paid out every quarter. And his plan also consists of a threshold.
Then, he’ll get the quarterly commission only if his team collectively hits 80% of their quota for that quarter.
Step 5: Consider granting equity
Granting equity to your managers gives them more skin in the game – motivating them to work harder.
Plus, if you’ve offered them stock options, they’ll have all the more reason to stick with you until their options vest.
Of course, you don’t have to offer equity to every manager you hire. It all depends on the situation.
Let’s say you’re a startup looking to hire an elite sales manager who can take your business to the next level. Problem is, you can’t match his current salary. In that case, offering him equity might be your best option.
Step 6: Consider gainsharing
Gainsharing is a reward program where employers offer incentives to employees who helped the company achieve certain performance goals.
Higher sales, for instance, is one of the most sought-after goals for any company. You could add revenue targets (monthly, quarterly, yearly, etc.) in your sales manager’s comp plan, and offer bonuses if those targets are met.
It doesn’t get more straightforward or more effective than that!
Step 7: Vet for legal compliance
The language used in comp plans is critical when it comes to any sales role.
And more so for sales managers since they handle so many different tasks, leaving a wider window open for disputes in case of performance issues or termination.
Your firm probably has a legal team that looks into stuff like this, but you should always double and triple-check for any loopholes before finalizing your sales manager comp plan.
Tips for Creating a Kickass Sales Manager Compensation Plan
Here are 4 tips you can keep in mind to build an even superior plan.
Don’t overcomplicate things
Look, I get it — it’s tempting to tempt your managers with all sorts of bonuses and rewards in the hope they’ll perform better.
And while tools like accelerators and spiffs are great for motivating your managers, you should avoid cluttering their plans. It can divide their efforts, leading to unsatisfactory results.
Below is the shortest ‘sales manager compensation plan checklist’ you’ll ever need:
- The plan summary should fit on a single page.
- It should be written in plain and simple English.
- Managers should know which task (X) will yield how many dollars (Y).
- Each of those tasks must align with your company goals.
Leverage historical data
Any kind of data is valuable. But your past performance data is gold.
Leveraging your company’s historical data to create a comp plan will help you create a realistic, attainable, and more comprehensive plan.
Some commonly tracked sales metrics you can use are:
- Average customer lifetime value (CLV)
- Churn Rate
- Lead Conversion Rate (LCR)
- Monthly Active Users
- Net Promoter Score (NPS)
Review and revise often
Another common mistake many companies make is, they design a sales manager comp plan and then just leave it be.
Unless you regularly review and revise your plan, how will you be able to account for demand fluctuations, new market trends, product launches, etc.?
Simply put, you won’t.
It’ll be like asking an NBA team to win a championship without ever tweaking their attack strategy!
Use automation software
The right automation software can do wonders for your sales manager's compensation plan.
It can help you during:
- Design stage: Syncing with your existing tools and providing a big-picture view of your systems and processes.
- Execution stage: Running custom programs like spiffs, automating payouts, and helping manage teams from one centralized place.
- Review stage: Tracking performances and generating real-time analytics that let you analyze the plan on micro and macro levels.
Streamlining is Key
Sales managers are your unsung heroes. They do a bit of everything and handle a bit of everyone.
Their compensation plan should be their friend and guide as they work to grow your company. It shouldn’t impede their workflow or cause them to feel slighted in any way.
That’s why you need to pay very close attention to their comp plans. Keep things simple and streamlined, and your managers should stay supercharged and satisfied.
