A sales manager helps train junior sales reps and new hires, monitor (and improve) performances, set team goals, keep their team motivated, and a lot more.
That’s why finding the ideal sales manager becomes a crucial part of running a successful business.
But as important as the role is, finding the right person to fulfill the responsibilities, is easier said than done. Apart from the skill set, businesses also need to be able to offer monetary compensation that makes sense and piques their interest.
But what is the ideal sales manager compensation plan? And how does one draft it?
This blog is a guide for businesses aiming to create or enhance a sales manager compensation plan that both attracts top talent and drives the right performance behaviors - all while maintaining a healthy bottom line.
Key components of a sales manager compensation plan
In this section, we’ll cover what exactly is included in a compensation plan and what each component means.
1. Base salary: The foundation
A sales manager compensation structure will always have a base salary or base rate. This makes up the basic building block of any compensation and is also the highest component of it. This is a fixed sum of money that guarantees a certain level of financial security and stability. The salary base ensures managers can focus on strategic goals without the concern of fluctuating income.
Base pay is typically determined by industry standards, company size, geographical location, and the manager's experience level. This often comprises 60-70% of the total on-target earnings (OTE). The percentage reflects the added responsibilities of managing a team and ensuring their success, resulting in a compensation plan that is slightly less aggressive than that of a sales representative.
For example, a candidate applying for a sales rep role with an OTE of $250,000. During the interview, they learn the base salary is $150,000. But if they hit their quota, they can earn an additional $100,000 in commission.
2. Performance-based incentives
Next up is performance-based incentives. These incentives are variable compensation elements that are dependent on an individual’s overall performance. The primary goal of this compensation is to ensure the individual (sales manager) and company are working towards the same goals.
For a sales manager compensation plan, this is directly linked to achieving sales targets and motivating managers to drive their team’s success. Frequently considered parameters for performance-based incentives consist of total team quota attainment, increase in revenue or bottom line, new business acquisition, etc.
The structure of these incentives can vary, but they often represent 30-40% of total compensation. This variable pay may be structured on a monthly, quarterly, or annual basis, depending on sales cycles and company preferences.
3. Bonus incentives
Bonus incentives are extra payments for performing to a higher level than expected or for accomplishing the defined business goals. They are not components of the normal performing compensatory package; instead, they are meant usually for some activities or targets that go beyond the normal group's sales quota.
The sales manager bonus structure usually includes cracking new territories, implementing new selling techniques or significantly improving team performance.
Bonuses usually form 5-15% of the total compensation package approximately and are mostly paid out once a year or at the end of the task or upon meeting the set goal. These are usually set aside for top performers.
4. Accelerators and multipliers
These increase the payout for outstanding performance, incentivizing managers to consistently over-deliver on targets like total sales.
For example, a simple structure might offer 1.2x the payout for achieving 110% of the target, 1.5x for 120%, and over 2x for 130% and beyond. This not only encourages managers to meet their goals but also drives them to pursue ambitious "stretch goals" that push performance beyond standard expectations.
This component of the sales manager compensation plan recognizes that the effort required to exceed targets often increases exponentially, and rewards should reflect this.
5. Buffer
The buffer component serves as a safety valve in case of loss since it provides a certain level of income security even during hard times.
This might take the form of a draw against future commissions, where managers can draw a set amount each month, to be repaid from future earnings. Alternatively, it could be a minimum guaranteed payout, often set at 70-80% of target earnings.
Buffers are most critical for first-time managers, those who are taking over underperforming territories or during times of market instability or change within the organization.
Exploring the roles and responsibilities of a sales manager
Sales leaders and managers are key drivers of an organization or startup’s success through:
- Leadership: Leading and motivating salespeople to hit their goals.
- Strategy: Formulating and modifying sales strategies per the business goals.
- Mentorship: Training and offering assistance to junior sales professionals.
- Collaboration: Working with the marketing and product divisions to achieve targets.
- Performance management: Keeping track of team performance and accountability.
- Resource allocation: Optimizing the use of tools, budget, and personnel.
- Forecasting and Reporting: Projecting sales actions and reporting them to the executives.
To carry out these roles and responsibilities, a sales manager must be strategic, skilled in analytical thinking, and have excellent communication skills.
How the responsibilities of a sales manager impact commission structure
Sales managers' roles have diverse responsibilities that call for a nuanced commission structure. These responsibilities include:
1. Strategic responsibilities
The sales manager commission plan should be structured in a way that encourages employees to think and act strategically in the long run. This includes the development of sales strategies and their implementation, and not merely focusing on making immediate sales.
Some sales manager bonus structure examples include incentives for the successful implementation of new sales strategies or expansion into new markets.
2. Team leadership and mentorship
A significant portion of a manager's commission should be tied to team performance, emphasizing the importance of effective leadership and mentorship. This could involve team-based bonuses or accelerators based on overall team quota attainment.
3. Trans-departmental interaction
Sales manager compensation plans should also incentivize working with different departments. This could include rewarding managers for cross-departmental efforts like aligning with marketing or product development to create more targeted strategies.
4. Target achievement vs process management
While hitting sales targets remains crucial, commission structures should also reward process improvements and system optimizations. This balance ensures managers focus on both immediate results and long-term, sustainable growth strategies.
Factors to consider when designing a commission structure for sales managers
A well-designed commission structure requires a deep understanding of the complexities involved. This ensures your organization creates an effective plan that aligns with the sales managers' roles and drives the right outcomes.
Here are some factors to consider when creating compensation plans for sales managers:
1. Company objectives
The commission plan should be strategically aligned with the organization’s long-term vision. This effectively integrates the goals of each sales team with the company’s top priorities—whether that’s increasing revenue, expanding market share, or improving profit margins. Doing so can help sales managers focus on the areas most critical to the company’s success.
2. Sales team dynamics
Team structure composition, levels of experience, and skills must be taken into consideration while determining commission objectives. This helps in providing goals that are both useful and realistic enough to keep all kinds of teams and team members motivated.
3. Market conditions
Tailor the sales manager commission plan to reflect external market conditions, including industry trends, competitive landscape, and economic factors. This flexibility allows for fair compensation in varying circumstances.
4. Performance metrics
Choose relevant and tangible performance metrics that align individual results with company objectives. These can include deal closure rates, revenue, profit margins, net new customer acquisition, or retention rates.
5. Payout frequency
Determine optimal payout intervals (monthly, quarterly, or annually) to balance motivational impact with company cash-flow considerations. This decision should align with sales cycles and financial planning.
Potential challenges when creating the best sales manager commission plan and how to overcome them
We’ve covered all the fundamentals that help in creating the ideal sales compensation plan. But it’s not foolproof. There are still a few roadblocks that you need to be aware of so you can avoid/overcome them.
1. Misalignment with company goals
Challenge: Some sales manager pay structures may incentivize behaviors that contribute very little to the overall business objectives.
Solution: Revising the compensation plans should be an ongoing and bottom-up process to link all the plans to specific company policies. Include strategic input from senior management while designing the plan.
2. Unfairness and equity issues
Challenge: Uneven pay and sales commission structure between different teams possibly due to different geographical regions, experience, etc.
Solution: Conduct periodic equity audits to compensate existing pay structures while maintaining progress as required. Apply unified policies on wage distribution and promotion processes.
3. Data accuracy and reporting
Challenge: Reporting inaccurate or performance data late can affect performance-based payouts.
Solution: Invest in Sales Commission Software to avoid manual errors, automate commission calculations, streamline reporting, and provide real-time visibility to both reps and leadership. Also establish clear data validation processes with multiple levels of approvals within the hierarchy to minimize the scope for errors.
4. Resistance to change
Challenge: Individuals may resist new sales manager compensation plan structures, fearing potential income loss.
Solution: Involve managers in the planning process. Communicate changes clearly, emphasizing benefits and earning potential. Consider implementing a transition period with income protection measures.
5. Short-term focus
Challenge: Over-emphasis on short-term objectives leads to a neglect of long-term strategic plans.
Solution: Balance short-term incentives with long-term rewards. Track metrics that indicate sustainable growth, such as customer lifetime value or market share increases. Offering long-term rewards helps prevent an overemphasis on immediate results, fostering a focus on lasting success.
How to build a winning sales manager commission plan structure
In this section, we’ll cover a tried-and-tested strategy to build the best sales manager compensation plan for your business.
1. Set on-target earnings (OTE)
Determine a competitive OTE by analyzing industry standards, company size, and location. This ensures the attraction and retention of top talent while maintaining financial sustainability.
But we recommend researching the OTE your competitors are setting. If your OTE is significantly lower than your competitors, you risk losing potential candidates who may be considering multiple offers.
2. Define sales goals and Key Performance Indicators (KPIs)
Setting specific goals and KPIs lay the foundation for performance-based pay for managers.
These might include team quota attainment, improvement in lead conversion rates, revenue growth, or customer retention rates.
Aligning these metrics with your overall business objectives ensures that your sales managers remain motivated to drive results that matter.
3. Evaluate sales manager roles and responsibilities
Conduct thorough market research on the common sales manager commission structure to design an appropriate compensation plan for your organization. Take into account the strategic, managerial, and operational responsibilities of the role.
Remember that sales managers often have to collaborate with other departments to align on strategies. The time spent on collaborations should be reflected in the compensation plan to reward cross-departmental teamwork.
4. Decide on the optimal pay mix
Balance fixed salary and variable incentives, typically aiming for a 70:30 or 60:40 ratio. This provides stability while motivating high performance.
But considering the role of a manager, these compensation plans should be less aggressive than those for representatives to account for a broader range of responsibilities - coaching, mentoring and managing teams.
5. Choose the right sales manager commission structure
Select a commission structure (flat, tiered, bonus-based, or hybrid) that aligns with your sales strategy and incentivizes desired outcomes. Consider using accelerators for exceptional performance.
With this, sales managers earn a higher commission percentage when surpassing quotas. Additionally, you can introduce thresholds, ensuring that variable components only kick in once pre-established team performance milestones are met.
6. Develop a transparent communication plan
Clearly communicate the compensation structure to ensure full understanding. Provide detailed documentation and be open to questions and feedback.
Transparency fosters trust among sales managers. This ensures that the managers remain aware of how their efforts contribute towards the earnings.
7. Vet for legal compliance
The multifaceted nature of a sales manager’s role can lead to legal considerations. It’s important to ensure the plan is legally sound, with clear language minimizing risks of disputes.
Pay special attention to performance metrics and termination clauses. Consult with your human resources and legal team to identify potential loopholes and compliance with labor laws.
8. Implement, track progress, and adjust
Update the commission strategy on an ongoing basis through a quantitative approach. Making changes to remain in sync with the goals of the company and the evolving market conditions is necessary.
Regularly review sales performance data to identify trends and areas for improvement. This allows for timely adjustments to the compensation plan that reflect both market dynamics and organizational objectives, which can help proactively address skill churn too.
Wrapping Up
To build a truly effective sales manager compensation plan, treat it like a dynamic framework rather than a fixed formula.
From incentives that drive personal performance to bonuses that reward teamwork, each element in the compensation plan should work together. It shouldn’t just align with the sales manager’s motivations but also the company’s broader vision.
Remember to also account for market shifts and how goals evolve. Regularly revisit and refine the sales manager compensation plan to ensure it remains a powerful motivator for the team and an enabler of sustainable growth in competitive markets.
