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How to Build a Sales Manager Compensation Plan

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June 5, 2021

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Undoubtedly, one of the primary goals for your startup is scaling it so you can create long-term, sustainable growth. An integral part of this strategy is finding a sales manager who can help make this happen. To attract a high-performing individual for this position, you'll need to create an enticing compensation plan.

Your ability to tie individual performance to your organization's growth goals is essential for long-lasting success. A great sales manager compensation plan motivates your leaders to provide the expert training your sales team needs to boost your startup’s profits.

This position is crucial to your company's success. That's why devising a compensation plan that rewards your sales manager for exemplary performance should be at the top of your to-do list.

This article will cover these three points:

  • How much the base salary of a sales manager should be
  • Whether you should use a threshold plan
  • Identifying managerial behaviors you want to reward

Let’s get started!

Determining on-target earnings (OTE)

Before you hire your sales manager, you’ll need to determine what their on-target earnings should be. This is how much they’ll make if they hit all their sales targets.

To do this, make sure you understand the following things:

  • How are sales managers at competing companies being compensated, including base salary and variable incentives?
  • How fast are my competitors growing?
  • How much has my company’s growth been over the last two years?

Split your on-target earnings evenly between base salary and variable incentives. The more you can tie compensation to actual sales results, the better off your company will be. This also allows your manager to make significantly more money than if they only got a fixed base salary.

Some candidates might ask for a guaranteed salary for the next six to 12 months. The rationale they'll give for this request is that they're leaving a good-paying job for a riskier one. They might also say they want their compensation to cover them until they’ve built their team and have established solid sales processes. Whether you grant this is totally up to you.

How much should the base salary of a sales manager be?

Sales management compensation can be tricky. If you offer too little, it can be challenging to attract and retain high-level talent. If you pay out too much, you could find it difficult to scale because too much money goes into compensation packages.

Also, management compensation that’s not tied to performance disincentivizes sales leaders. The result is they become lackadaisical in carrying out their responsibilities.

A sales manager's job isn't to generate revenue but to bring out the potential of team members so your business can grow and scale. Therefore, compensation should be based on achievement and not just be a percentage of profits. Otherwise, there will be no incentive to boost managerial performance.

Here are some metrics you might want to use when figuring out compensation packages:

  • Year-to-year revenue growth
  • Year-to-year gross profit growth
  • Year-to-year net profit 

Other metrics to consider include:

Overall quota attainment (if all team members hit the quota, the leader gets a bonus)

A sales leader should receive a base salary that's between 60 and 70% of on-target earnings as a general rule.  

A manager is going to know the compensation of the team members they're overseeing. A leader won't be happy to discover that an average-performing team member raked in more than they did.  That's why a manager's compensation should reflect having more responsibilities than those they supervise.

This doesn’t mean the manager must necessarily make the most money of any team member. A high-performing employee might out-earn their manager under certain circumstances. However, managers shouldn’t earn less than middle-tier team members.

Should I use a threshold plan?

A threshold plan means the sales leader’s variable pay (any money paid to an employee linked to performance) doesn’t kick in until the entire team meets predetermined milestones.

If your company has an established sales process in place, a threshold plan makes sense. However, if you’re still tweaking your approach or your manager is responsible for overseeing an army of reps with little to no experience, a plan like this isn’t exactly fair.

Should a sales manager get an equity grant?

Managers granted equity have more of a stake in the company’s long-term performance. Equity also gives them a reason to stay until their stock options vest.

If you want to grant equity, talk to your CPA before doing so. Equity for early-stage employees is generally 1 to 5%.

You might also want to consider issuing phantom stock. Phantom stock is when employees receive all the benefits of stock ownership without the company granting them actual equity. It’s worth money just like real stock, and its value rises and falls with the company's value.

According to Paul Bardaro, Partner and CPA of Rucci, Bardaro, and Falzone, "Phantom stock can be a highly effective compensation tool. Employees are allowed to enjoy a sense of ownership in the company and share in its future success without necessarily sharing in the voting control, profits, dividends or distributions that normally accompany the issuance of legal equity.”

The employee is ecstatic because the potential financial benefit of participating in a phantom stock plan mirrors the payout of an actual options plan. The company is happy because they avoid the risks they’d normally incur with equity ownership.

What about gainsharing plans?

A gainsharing plan is when an employer offers a share of the business gains that result from improved performance. This plan is used to motivate employees to work better.

Bonuses are usually awarded either quarterly or annually.

Gainsharing differs from profit sharing in that it's directly based on improved performance. In contrast, profit sharing is based on the total profits a company makes.

Make sure your plan is easy to understand

The purpose of a sales manager compensation plan is to incentivize leaders to motivate their team to generate a lot of sales revenue. A sales manager compensation plan must drive the right sales management behaviors but not be so complex that it's not easily understood. Try not to make it more than one page long.

Identify sales behaviors you want to compensate for

Identify and define management sales behaviors that support your larger business goals. By doing this, you’ll be able to design a sales manager compensation plan that’ll get you the results you want. This eliminates ambiguity and sets clear expectations.

For example, will you still compensate if your manager achieves their revenue quota but does so at a deep discount, causing profit margins to go up in smoke?

Example of a sales manager compensation plan

Base pay of $90,000 in annual Salary Plus commission and bonus

The company will provide:

  • A company paid cell phone
  • $200 monthly vehicle allowance
  • Monthly and quarterly bonus plan

Monthly bonus plan

For each salesperson who meets their quota, the sales manager will get $750.

Yearly bonus plan

If the entire sales team hits all quotas, the manager will receive $5,000. If there’s a 35% or more increase over previous sales, the manager gets $3,000.

Creating a culture of success

When a sales manager’s compensation package is tied to achieving specific goals, they’ll be incentivized to carry out the sales behaviors that produce those results. This helps create a company culture that fosters a sense of urgency. This will help you scale your business to unprecedented heights.

Another way to scale your company is by building a talent pipeline that’ll provide you with a steady stream of high-performing candidates. If this is something you need to do, reach out to us at Hunt Club. Our amazingly efficient highly targeted recruiting strategies will get you the team members you need when you need them.

Give us a call today!

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