The consultant answer is “it depends” but unfortunately that really is true this time! For starters, I’d ask how much time the manager is spending managing vs. doing. You want to allocate his/her incentives accordingly. If 75% of his/her time is spending being a player, then 75% of pay should come from his/her individual performance (on the sales rep plan) and the other 25% should come from duties relating to managing the team (coaching).

Overrides can be problematic as a way to pay a sales manager, although they are very common because they are easy and economically straightforward (just take the % you can pay in total for a sale and split it up between reps and managers – your CFO will love the economic simplicity and direct alignment to profits). The problems arise because the manager ends up with a little “empire” of people that, if they are good, the manager will not want to have transfer to any other division even if that is best for the employee and the company. Also, managers can get “fat and happy” on an override plan without too much accountability. It is better to set a goal for the team’s performance and hold the manager to attainment of that goal rather than give them a % of the total team’s sales. Also, your managers likely have higher base salaries (less variable pay mix) than the reps, so you may not need to pay them as much (or as soon) from an incentive standpoint. It’s not uncommon to pay managers quarterly when their reps are paid incentives monthly. However, this varies from industry to industry and some industries are “locked in” to paying managers monthly on a plan that looks and feels much like a sales rep plan but is based on overrides.

The other thing to consider is a “Coaching Effectiveness” bonus whereby the manager is paid for the % of reps on his/her team who achieve target performance in their key financial metric. This encourages the manager to work with all members of the team to manage everyone to a higher standard (or get rid of the ones quickly who can’t get there). A plan based purely on an override formula can make a manager a lot of money based on the performance of one superstar on his/her team without pushing the manager to work with everyone on the team. I almost always recommend the inclusion of a 20% element for Coaching Effectiveness for my clients and universally they report that this is a great measure and fills in a missing link in the sales manager’s incentive plan.

If you do want to calculate a comission rate for an override plan (in spite of my warnings above) then you do that much the same way you do for the sale rep plan. You need to approach it from 2 directions. First, how much can the company afford to pay as a % of revenue or profit and how should that be allocated among reps and managers and second, how much do you need to deliver in pay at target performance to attract and retain top sales managers. Often we start with the second question, which gives you the numerator (“our managers need to make $50K in incentive pay at target performance”), then ask productivity questions to determine the denominator (“and we expect a good manager to generate $10M”), and the result is a starting point for a commission rate (in this case 0.5% or 1/2 a percent). Then you check this against the answer to the first question and see if it lines up with what is feasible to pay and still generate the requisite profit for the company. If it doesn’t, then you may need to adjust the assumptions you used to generate the numerator and the denominator. However, this is often the point in a design discussion where some compromise is needed (or a change in the staffing model – maybe for $50K the manager needs to manage 15 reps each generating $1M rather than just 10 – which which case his rate would now be 0.33%; or maybe the reps need to generate $2M each instead of $1M). Just be sure you model out the results, factoring in the reps’ commission payments as well as the managers’ to make sure your plan is affordable and will help you continue to attract and retain top talent.

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