How to Design a Sales Manager Compensation Plan

Feb 27, 2020
4 min read
Learn everything you need to know about creating a successful sales manager compensation structure. Includes detailed examples.

When it comes to sales compensation planning, you can never start prepping too early, right? We hope you’re nodding right now, and we couldn’t agree more. One of the most important things to consider when planning commission is the different roles on your sales team. Sales managers and their reporting reps will have varying responsibilities in their roles, which means your compensation plans should be tailored to each different role. In this piece, we'll take a top-down approach and start by designing a sales manager compensation plan.

First and foremost, sales managers are responsible for their team’s performance, and typically, they are measured on their performance, with additional components that are relevant for their managerial responsibilities. This alignment ensures that sales managers are steering their ship appropriately and that all the reps they manage are rowing in the right direction. In fact, the best way to ensure sales managers do their job well is by creating an incentive plan that drives the right behaviors.

Constructing Commissions in a Sales Manager Compensation Plan

Pay Mix and Upside 

A large part of sales management is accepting responsibility for a team. Because of this, sales managers need to split their time between sales coaching and closing business. As a result, a manager’s pay mix is typically less aggressive than the reps that report to them which means it is not unusual for top sales reps to earn more than their managers. 

Sales Manager Plan Components

As previously mentioned, sales managers should be well aligned with the components of the reps they manage as well as their managerial duties. At many companies, reps may not have control over pricing and discounting policies. In these cases, it makes sense to measure reps on a revenue plan component, while the sales manager compensation plan should be measured on a margin or pricing component (learn more about different sales commission structures).

For example, here is a sample sales manager compensation plan typically used for a Software as a Service (SaaS) company (learn more about the software sales commission plan, here).


Considerations for a Sales Manager Compensation Plan

Find your Leaders

Your best sales rep is not necessarily the best leader. When promoting sales reps to manager roles, it's important to consider communication and leadership skills in addition to sales performance. A top sales leader needs to be able to coach reps on their team, monitor rep performance continuously, and intervene with poor performance if needed. Consider the following questions when selecting a new sales manager:

  • Have you promoted your best rep out of the field or have you truly found a sales leader?
  • Do you have a training plan to develop other leaders as you grow? 
  • How many people can your leader supervise? 
  • Do you expect ride-alongs, direct supervision, daily conversation, and tracking? 

Set Reporting Responsibilities

The typical compensation plan defaults to credit with the sum of all deals from their assigned sales reps. When new sales reps are added, they will automatically begin crediting to their management. As part of your incentive plan design, consider the roles that will report to each sales manager, and ask yourself the following questions:

  • Will your manager supervise one type of rep or a sales team of mixed roles (Sales Executives, Account Managers, Lead Generation Reps, etc.)?
  • How do you want to think about crediting the manager? Should any sources of revenue be excluded from managerial crediting?

Set the Quota

The performance period for sales managers typically defaults to whatever their direct reports are given, including monthly and quarterly goals which might also be set to guide both reps and managers. Questions to consider when managing your sales quota include the following:

  • Should managers have a quota that is over-assigned (i.e., the manager’s quota amount is higher than the sum of the individual quotas of the manager’s team)?
  • Are there open positions in the manager’s team? How does the manager’s quota reflect open positions, new reps, and experienced reps?

Set the Opportunity

Many companies vary payout levels based on performance to reward top managers. This means you should think about your sales cycle as you set the manager’s performance period. Also, you should consider including a revenue-based bonus structure (read more on the commission vs. bonus debate here), improved staffing, or well-designed territories. You should leverage sales performance management software to review past performance when setting payout opportunities. Questions to consider include the following:

  • How much will a manager earn if all of their reps are at quota?
  • How much will top reps make as compared to their managers?

The Importance of Data in Planning

Sales performance data can be a useful asset in compensation plan design. Data can and should be used to optimize sales territories and compensation plans to ensure fair, balanced territories and proper quota assignment for sales managers and their teams.

However, to help ensure your compensation plans are competitive, you need to benchmark against industry pay and performance trends. Using Xactly Benchmarking, companies can benchmark their existing compensation plans against more than 15 years of aggregated pay and performance data to ensure incentive plans are competitive within their industry. The more data companies have access and rights to, the more insight they can get into their sales performance, the effectiveness of their sales plan, and increasing forecasting accuracy.

Communicating the Sales Manager Compensation Plan Effectively

In conclusion, all compensation plans require effective communication to be successful. This means they must drive the right sales management behaviors, but at the same time, not be so complex that they are not easily understood. Effective plan communication starts with a top-level approach and works its way down, ensuring that each level of management fully understands the components of the plan.

In addition to your sales territories, your compensation plan(s) are critical components of your overall sales plan. Together, they can help power and motivate your sales force to reach objectives. Using data to optimize and guide your planning helps create a strong sales manager compensation plan. Ultimately, this helps managers focus on motivating reps, boosting sales performance, and driving revenue. And then everyone wins!

  • Incentive Compensation
Karrie Lucero
Karrie Lucero
Content Marketing Manager

Karrie Lucero is a Content Marketing Manager at Xactly. She earned marketing and journalism degrees from New Mexico State University and has experience in SEO, social media and inbound marketing.