Sales Compensation Focus

Mission Possible: Setting Good Sales Quotas
By Mehmet Bozbay, ZS Associates

While quotas can be a powerful instrument to motivate and reward salespeople, they can cause significant problems for organizations if not set correctly. Improperly set quotas can lead to extreme outliers on both ends of the performance spectrum, as well as exceeding allocated budgets, top performers missing their quotas and a demotivated salesforce with high turnover. Considering those possibilities, it should not be surprising that good quota setting is the top issue for sales incentive planners, according to the 2012 “Annual Incentive Practices Research” study, conducted by the author’s company.

Even though it is challenging to set good quotas, companies should not think it is impossible. Companies can and do set quotas for their salespeople that:

  • Provide clear direction and alignment with the sales strategy and forecast.
  • Provide maximum financial and emotional salesforce motivation.
  • Account for territory differences and provide for equal opportunity.
  • Pay for performance.
  • Assess and appropriately reward top and bottom performers.

Addressing the Pitfalls of Quota Setting
So why do companies struggle to set fair quotas? Part of the answer is related to the amount of time dedicated to the quota-setting process. In the experience of the author’s company, companies usually spend 90% of the planning period on plan design, and 10% on their quota-setting approach. This tends to result in incentive compensation professionals not considering important factors and leads to misallocation of the national forecast. Also, the challenge in most organizations is most of these “professionals” are really not subject-matter experts. Individuals are in sales operations or marketing, and may not have the necessary breadth of knowledge for key tasks.

Several pitfalls can make quotas unrealistic and lead to field perception that quotas are not set rigorously. Those pitfalls include (but are not limited to):

  • Allocating a poorly set forecast: Allocating rep-level quotas using a national forecast created based on a company’s aspiration to unrealistic growth leads to unrealistic quotas for sales reps. Also, the data used for setting the national forecast should be compatible with the data used for calculating territory-level performances. For example, if the salesforce doesn’t cover certain accounts (national accounts, house accounts), allocating the national forecast to territories without accounting for the uncovered accounts will result in unfair expectations of the salesforce.
  • Not accounting for potential: Many companies determine salesforce expectations based purely on historical sales success. Some do so by choice and others because they do not have access to competitors’ sales at a territory level. Incorporating the territory’s potential into quota-setting methodology is one of the most crucial pieces for devising fair quotas, especially for products that are in their growth phases, as potential can be a significant indicator of future sales. In the absence of market sales data, it may seem impossible to determine potential, but sources such as Dun and Bradstreet, InfoUSA and the U.S. census can help approximate potential.
  • Ignoring extreme (high and low) growth expectations: Companies should examine quotas generated at the rep level for extreme growth expectations. Setting appropriate caps and floors on the final quotas not only helps with the perceived fairness of the quotas but also helps eliminate outliers. For example, a cap can be established based on the maximum historical growth achievement.
  • Finalizing quotas without field interaction or knowledge: Local knowledge helps quotas reflect on-the-ground realities and increases buy-in of sales managers, which, in turn, increases buy-in of sales reps. Companies should impose reasonable limits on the degree of change (such as 5% to 10% of the original quota), and use a rigorous process through Web-based tools.

Summary
Quotas can be an incredible motivator and can provide clear direction to the salesforce, but if set improperly, they can have the opposite effect. To set fair quotas, it is critical that companies validate the national forecast, account for potential, set appropriate caps and floors, and incorporate input from the field. Such an approach will make quota setting not only possible, but achievable.


About the Author
Mehmet Bozbay is a manager at ZS Associates in Evanston, Ill. He can be reached at mehmet.bozbay@zsassociates.com.


Read the September 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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