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Three Key Approaches to Building the Best Incentive Compensation for Sales Managers

Planning is a vital element in the process of selling. Sales planning empowers leaders to model real-world business scenarios and create more efficient incentive compensation plans for sales managers.

Three Key Approaches to Building the Best Incentive Compensation for Sales Managers

From territories and quotas to sales revenue forecasts and sales budget plans, sales organizations today seek to define clear targets for their business, choose only the sales strategies that work in their target market, identify sales tactics, motivate and enable the sales team to be at the top of their game and, last but certainly not least, review and improve goals and approaches periodically. So, what are the right performance measures for your incentive compensation plan?

An important step in plan design (after the incentive plans for sales representatives are completed and modeled) is to develop plans for the front-line sales managers. Top players generally use one of three approaches based on their pay philosophy:

Identify sales managers as members

This approach identifies sales managers as members of the company’s management team and puts them on the same incentive compensation plan as other managers in their pay grade. This usually means that some portion (typically 70%) is based on one or two financial measures at the region/area/sales channel level, with the remainder based on personal objectives (which are also used to determine merit pay increases).

At times, the measures are as high as the total company level. In such cases, this approach is less effective since measurement at that level is far from the line-of-sight of the managers. Hence, there is a chance for sales managers to develop a perception that they can’t make much of a difference towards impacting those high-level goals. In fact, this approach may well defeat the purpose of the incentive plan in some situations, which speaks volumes of the importance of plan design.

Identify sales managers as team leaders

We’ve seen how compensating sales managers like others in their pay grade can affect the incentive plan. What about identifying sales managers as team leaders who have their incentive pay directly linked to the performance of their sales?

In this scenario, one or two of the key components of the sales representatives’ plan become the measures for the managers. The focus is now purely outcome-based (e.g., new revenue, revenue growth, profit), not so much based on sales-related activities (sales calls, closed leads, etc.). Activity measurement is best for the annual performance appraisal for the managers’ merit pay increase.

The performance measurement for this approach is (most of the time) quarterly, when both sales reps and sales managers are on quarterly plans under similar performance measures – in some cases for an annual component and in some cases for one of the measures. This approach is what you can commonly see across a flurry of industries. In pharma, we typically see a plan where managers are paid on the average of their sales reps, with a multiplier to adjust for the target difference.

A little bit of both worlds

As you might have guessed, the third approach is a combination of the previous two – for example, 70% weight on team performance and 30% on financials. This sends the clear message that the primary responsibility is to meet the sales goals that support the Company’s financial metrics. The company stresses the importance of the sales representatives meeting or exceeding goals while also recognizing Sales Managers’ status as members of the management team. In this case, other performance measures are used for merit pay increases as well.

In some companies, usually at a startup level, sales managers are offered equity in the firm as part of the compensation package. Keep this in mind as a possibility, but be careful not to offer too much equity. 1-2% is probably enough for both parts to be satisfied: sales managers feel motivated to perform, while the company avoids the dilution of decision-making.

At the end of the day

The first approach may be suitable for small and mid-sized companies, where the sales managers can feel a sense of contribution towards achieving the overall company’s financial goals. This approach is preferred where the sales manager’s role is minimal in the team’s sales outcomes.

The second approach might be considered for large sized sales teams, where the sales managers play a direct or significant role in the sales activities and outcomes of their team of sales representatives, but are not able to see the impact they could directly make on the company’s financials.

Finally, the third approach can be suitable for small- and mid-sized teams where the sales managers can play a significant role in their teams’ sales outcomes and have a better line-of-sight.

Because it often makes or breaks the entire incentive compensation plan design, a thorough understanding of the sales department (hierarchy, line-of-sight and any other ad-hoc factors) is needed, in order to identify the most suitable approach. If you’re eager to learn more about selecting the best performance measures for your incentive plan, visit our Sales Compensation Management solutions to see how we can help.

Learn How to Model Incentive Plans for Sales Excellence

Download our guide to see the impact of sales compensation plan modeling, details on varying approaches to modeling, and use it to make adjustments to your plan before roll out.

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