I knew of the manager setting on a user and it’s theorecitical use because I learnt it whilst studying for one of the CRM exams.
You basically have use a manager role to escalate messages, warnings, noticiations in CRM. So rather than hard coding a particular user you use the manager role and then in your workflows etc you use this role rather than hard code it to an individual.
I had problems today whilst trying to set a manager for someone, in fact it was greyed out. This had me puzzled for a while and then I managed to figure it out.
You can’t set a manager to someone who is a manager.
which doesn’t sound like real life because most managers have managers.
This is a bit quirky but if you run into this problem one day I hope you will remember this.
Hosk's Dynamic Blog 
Ben,
By default Manager field is greyed out and you will need to set up a manager by pressing ‘Change Manager’.
Have you tried this?
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I did try this but I couldn’t set a manager if the person is a manager
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I had no problem setting up hierarchical managers.
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I have no problem with setting up hierarchical managers as well.
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Hi Hosk,
I think BU of both the managers are different that’s why you are unable to set.
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