Sales Director Plan Designs - not the same as those for individual sellers

Sales Director comp plans should bear a strong relationship to the plans of the individual sales people, but should also have a few key differences:

1. Be sure the Director of Sales "wins" when his/her people win. So starting with their compensation plan and aggregating is a good approach for at least one measure.
2. Even if the individual contributors have a commission-type mechanic (payout is a percent of what is sold), consider a bonus-type mechanic for the Director job (payout is a target amount for hitting goal, less for less and more for over-goal achievement).
3. If your reporting systems support it, you might consider a measure of "contribution margin" for the Director. That would be [sales] - [cost of sales] - [directly controllable sales operating costs]. That measure rewards the Director for making the right tradeoffs in sales resources to get the maximum contribution from the overall sales force.
4. Another great idea for sales managers is a bonus based on the number of direct reports who meet or exceed their sales goals for the year. This type measure doesn't allow riding on the coattails of the over-performers, and encourages good coaching, hiring, and “pruning” of the organization over time.
5. The pay mix for the Director of Sales is generally less incentive-rich than that for the individual contributors. So if your individual sales people have 60% of their target total compensation in their base (at midpoint) and 40% in their incentive (at target), that’s a 60/40 mix. In that sort of situation, a Director of Sales might have a 70/30, or even a 75/25 mix.

Rewarding sales people for both revenue and profitability

When sales people directly influence both sales volume and profitability of what they sell, rewarding them for doing both well aligns their incentives with value creation for the company. Here are three approaches to consider:

1. Make revenue the primary measure using a bonus-type mechanic, and add a profitability multiplier. For example, they could add 20% to total earnings (1.2 multiplier) at year-end if a stretch profitability goal is achieved, lose as much as 20% of total earnings (0.8 multiplier) if they are below an unacceptable level of profitability, or have no effect on their own earnings in-between (1.0 multiplier). This would be most appropriate if revenue is the most important focus for sales, with profitability in the also-important category. It would also be appropriate if profitability is difficult to measure at the individual level, but very accurate by business unit or in aggregate.
2. Measure sales people only on gross margin or gross profit dollars, and drop revenue. This would be appropriate if you can accurately measure profitability by individual sales person. Here again, a bonus-type mechanic is probably the best choice.
3. Use a matrix with revenue goal attainment on one axis and profitability goal attainment on the other. In the middle of the matrix (at goal on both), pay 100% of the target incentive. As both revenue and profitability increase, pay over-target earnings. Pay very little for below-goal performance on both. And pay in-between if they’re over on one measure and under-goal on the other. It’s a little tricky to design the matrix, but once you’ve got it, it’s very easy to understand and administer.