If sales is comparable to sports, your sales manager is the passionate and insightful coach guiding your top performers to the finish line every day. So, your sales manager’s compensation plan needs to incentivize them to sell and hit their quota, while also giving them the solid foundation to make the right choices for the long-term success of the team and the business.
We’ve got you covered. In this blog, we’ll cover five key tips to create a sales manager comp plan that’s compelling, competitive, and aligned with your business goals.
What Should a Sales Manager’s Commission Be?
Sales managers occupy a unique space in sales organizations. Beyond maintaining their own client list, they play a crucial role in hiring, training, and motivating sales reps, monitoring performance, and keeping pace with competitors. They’ve always got to be thinking ahead, paying attention to the minor issues and new trends before they turn into major problems.
When there’s such a wide variety of tasks, it’s no surprise that business owners and sales leaders wonder how much commission a sales manager should earn.
The short answer is that many organizations aim for a commission rate that’s slightly higher than the one set for account executives (AEs) and stable enough to allow managers to focus on big-picture items.
The most common sales manager compensation plan we see breaks down to:
On-Target Earnings (OTE) = 60% base pay, 40% commission
So, if the OTE for a sales manager role is $150,000 per year, the sales manager will earn a $90,000 base salary and $60,000 in commission if they hit 100% of their quota each sales cycle.
The long answer is that many different factors should feed into the commission rate you set. For example, you’ll want to weigh the experience level of the sales manager, the average contract value (ACV) of deals, the incentives that motivate them to succeed, and the company goals you are looking to accomplish in the long run.
5 Tips for Building a Better Sales Manager Compensation Plan
Creating a sales manager comp plan is your golden opportunity to align day-to-day tactical behavior with your business’ key objectives. However, it can be challenging to strike the right balance. Pay too little, and you won’t be able to attract and retain the top talent that maximizes sales performance. Pay too much, and you’ll struggle to scale your team and achieve effective growth. These five strategies will simplify the process, whether you’re building your first plan or refreshing and refining your current one.
1. Keep it simple
When designing a sales compensation plan, there’s a tendency to overengineer. It’s not uncommon to see base salary, sales commission rates, ramp-ups, accelerators, decelerators, sales performance incentive funds (SPIFs), and time-based bonuses all dancing around on the same spreadsheet.
It may seem like you’re giving your managers more opportunities to earn a bigger paycheck, but having too many elements can actually cause a conflict of attention. Your business priorities won’t be clear to them and they’ll be unsure of where to actually spend their time, creating a misalignment.
Make sure the relationship between objectives and payout is crystal clear. Use simple formulas and digestible language, like “X new contracts per month yields Y dollars,” particularly if you use a variable pay structure.
2. Use historical data
Nothing stops a comp plan in its tracks like unrealistic objectives or metrics that are difficult or impossible to measure. Wherever possible, draw on your company’s historical data and reflect on past sales performance to inform your goal-setting. Not only does this step save time when building a comp plan, but it makes it more likely your team can beat or exceed their sales quotas. For instance, pull insights from commonly tracked sales metrics like:
- Percentage of revenue from new customers vs. existing customers
- Average lifetime value (LTV) of a customer
- Average contract value (ACV)
- Deals won vs. deals lost
- Cost of selling vs. revenue earned
- Year-over-year growth
- Market penetration
- Net promoter score (NPS)
3. Consider a higher base salary
Prospecting, selling, coaching, strategizing, analyzing — sales managers do it all. Whether they have three direct reports or 25, your sales managers need time to actively oversee and nurture the company’s sales force. A base-heavy compensation package may be just the thing to help them — and their sales team — perform their best. When they aren’t focused on meeting quota, they’ve got the time and energy to jump in and do one-on-one training, develop sales enablement resources, and more.
Use the most up-to-date salary data from sources like Glassdoor, Salary, and Payscale to find a benchmark figure and build from there. For instance, the average sales manager salary in 2021 was $61,823, but that number varies widely according to experience, location, and more. And salary isn’t the only piece of the puzzle, as we’ll cover next.
4. Create a structured bonus
Another useful tactic is to illuminate the path to success by using bonus structures and commission structures. Sales bonus plans are clear-cut milestones that drive better performance and draw a straight line between business objectives and sales goals. Here’s a snapshot of a few different structured bonuses you can use:
- Direct commission plans: Pay a higher commission rate for valuable deals
- Team bonus structures: Set a group sales goal and pay a certain percentage or fixed bonus
- Flat-rate bonuses: Pay a fixed bonus for each milestone, such as $200 for each $1,000 new account
Bigger isn’t always better. You can always pull other levers, such as ongoing commission rates or perks like team trips and gifts, to spur growth and foster retention.
5. Refine and improve
Our final piece of advice is to regularly revisit and fine-tune your plan. A sales manager compensation plan should never be a “set it and forget it” kind of deal. The COVID-19 pandemic was an extreme example of market change, forcing in-person sales teams to master omnichannel commerce overnight.
Your sales managers are the ones on the front lines, navigating these new challenges and supporting their salespeople through thick and thin. So, it is essential to be constantly evaluating and refining their compensation plans. The same holds true for your other sales leader compensation plans, including the ones crafted for your Chief Revenue Officer (CRO), VP of Sales, or Sales Director.
Not only will this make them feel supported, but it will allow them to achieve the best results for the company — like a killer sales comp plan should.