Sales Compensation Focus

Stop Setting Unachievable Sales Quotas: How Sales Reps Can Help
By Jonathan Ezer, ZS Associates

Companies often use quota-based plans to reward the salesforce, and for good reason. Quota-based plans communicate expectations and clearly define excellence. They make it easy to align sales representatives’ objectives to the company’s, and can account for factors outside of reps’ control. However, quota-based plans work best when quotas are fair and reasonable. In many firms, that’s not the case. In recent years, multiple studies on sales compensation have found that the top concern — for both administrators and sales reps — is unachievable sales quotas.

While just because a rep missed a quota doesn’t necessarily mean the quota was unachievable — the rep may simply be underperforming — when a large percentage of reps miss their quotas, there’s probably a problem with the quotas, and the quota-setting process. This article takes a look at that process, and provides guidance on setting accurate quotas.

How the Situation Goes From Bad to Worse
Many reps start the year expecting to reach their target earnings but fall short, which not only creates professional disappointment, but potentially financial stress. Moreover, many incentive plans have a threshold, or a minimum level of performance, that reps must reach before earning any incentives. When the majority of the salesforce is under quota, a significant number may also be under threshold and earn no incentive pay at all.

When many reps are “out of the money,” the salesforce becomes demotivated, morale declines and overall sales effort is diminished. The end result: The company’s revenue is lower than if the quotas were set more realistically.

Unachievable sales quotas not only affect a company financially, but organizationally as well. When large numbers of reps miss their quota, they begin to lose confidence in sales management. Reps may feel the quotas are set blindly from above, with no appreciation of economic realities. Or they start to view quota setting as a political process in which reps with more power get a lower quota. Reps may also feel sales leadership blindly assumes past growth rates can be duplicated or surpassed, and leadership makes these assumptions without understanding local market conditions. Unfortunately, these claims are sometimes true, and a palpable sense of anxiety and negativity percolates through the organization.

Potential Solutions
Compensation professionals see these issues and, in response, try to set quotas more scientifically with approaches that take into account market potential and realistic productivity expectations. The methods used at leading companies include:

  • Maintenance plus growth: All territories are expected to maintain previous sales levels, and grow based on market potential.
  • Index: Territory-level measures determine what share of the national forecast should be allocated to each territory.
  • Regression: Regression analysis helps determine the importance of different factors in predicting future sales.

To be truly effective, however, compensation professionals need to accurately assess historical performance and market potential for each territory. Modern IT systems can usually provide an accurate accounting of historical performance, but determining market potential requires quantifying the value of events that have not yet occurred. Various metrics can help, but ultimately, good quota setting requires a mix of science, experience and art.

A Radical Idea
As an example, take the case of a large insurance company in the United States that found setting accurate quotas particularly difficult. Each territory had unique market conditions, the data systems were not mature enough to compare territories scientifically, and reps were the main source of knowledge about each territory.

The company required a radical new approach. It implemented an innovative sales incentive plan that allowed reps to choose their own quotas. The target pay (pay earned at 100% attainment) was determined based on the quota chosen. The message was clear: Set and achieve a more ambitious target, and you make more money.

At first, it seemed as though the plan would be easy to game. Either reps could set the quota too low and make their quotas too easily, or set the quota too high and lock in a high target incentive. But the payout curve was carefully constructed to encourage salespeople to pick the highest quota they could reasonably expect to meet. Reps typically chose a quota between $1 million and $7 million.

The plan has been a success. Since reps had on-the-ground intelligence about their territories, the quotas reflect market potential. Reps feel more in control, and appreciate not having an unachievable quota imposed on them. They buy into the plan, and even consider it fun. Most important, they have a vested interest in achieving their quotas since they own them.

Taking Action at Your Company
This quota-setting approach works well if deep knowledge of each territory resides more with local reps and less with the centralized sales administration. In these cases, reps will be able to set quotas based on their unique understanding of market conditions. The method is particularly appropriate for salesforces with an aggressive sales culture since it encourages and rewards reps who achieve ambitious goals.

To implement this approach successfully:

  • Be sure to design a payout curve that cannot be gamed. It must encourage reps to choose the largest quota they can reasonably expect to hit.
  • Prepare communication materials to show reps that it does not pay to overstate or understate their quota.
  • Implement a quota-review process to make sure quotas are aligned with the national forecast.
  • If possible, apply a small weight to the quota component in the first year, and increase the weighting over time.

Conclusion
Quota-based plans have a lot of appeal. They are motivational, fair, easy to adjust and easy to administer. However, the success of a quota-based plan depends on an accurate assessment of sales potential. Firms will have to make their quota-setting processes more sophisticated to ensure that quotas are both motivating and achievable in the future.


About the Author
Jonathan Ezer is a consultant at ZS Associates in New York. He can be reached at jonathan.ezer@zsassociates.com.


Read the May 2012 edition of Sales Compensation Focus.

Contents © 2012 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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