On the surface, quota setting seems easy: allocate the corporate sales target down through the ranks. In practice, quota setting is very complicated, which introduces many opportunities for error. In most cases, each quota setting blunder diminishes sales force performance. Here is my top ten list of quota setting mistakes—from bad to worst.
#10. “Black Box” Process
Too many companies have an obscure quota setting process. Salespeople have no specifics about how their quotas were set. Here are several factors that cast a shadow over the process:
- No communications with details about how quotas were set.
- Only one functional area, such as sales or finance, is responsible for setting quotas.
- The process is totally top-down, with no bottom-up input or review.
A transparent process is achieved if you:
- Identify the major functional interest groups and the expertise needed from each to create high-quality quotas.
- Establish the amount of time required to conduct a high-quality quota setting process.
- Re-engineer the quota setting time frame for full participation.
- Utilize sales performance management (SPM) systems to help facilitate and expedite horizontal and vertical participation and review.
#9. No Quality Measures
Few companies measure the quality of their quotas. This is especially problematic given the critical role of quotas in sales compensation and the power of sales compensation in the overall sales management system.
As the business axiom goes: You can’t manage it if you can’t measure it. Applied to sales quotas: If you can’t measure quota quality, then you can’t manage quotas.
Companies struggle with managing quota quality because they do not measure or benchmark whether their quotas are good or bad. So, they resort to traditional wisdom and anecdotes. The results are not impressive:
- Only 57% of sales professionals expect to hit their quota.
- Only 18% of salespeople have “outstanding” job satisfaction.
- Only 3% of companies rate their quota setting process as “very effective”.
Quota quality measurement should correspond to the various roles quotas perform in sales and business management systems. In general, quotas perform four roles: convey strategic direction, motivate salespeople to achieve excellence, predict actual sales results, and penetrate market potential. Below are clarifying questions to help you define quota quality in each of the four roles.
Convey Strategic Direction
Which components of business strategy are especially relevant to the sales organization? For example, which products are most profitable? Which markets and customers are we targeting? What are our customer satisfaction objectives? Are our strategic messages conveyed clearly in the sales compensation plan?
Motivate Salespeople to Achieve Excellence
Do salespeople see a clear connection between company strategy, performance measures, and incentive payouts? Do salespeople see ample opportunity to impact their performance measures, and therefore their incentive payouts? Are top earners widely perceived as top performers, or just lucky? Are quotas perceived as fair and aligned with business strategy?
Predict Actual Sales Results
How well can the company forecast sales revenue? In other words, how close are business plan revenue targets to actual results? What factors drive sales forecast error for the company? How well do we predict revenue by sales region, district, and territory? To what extent do macroeconomic, industry, and competitive dynamics drive forecast error versus sales effectiveness?
Penetrate Market Potential
Do we measure market potential and use it when setting quotas, or do we only use historical growth trends plus a stretch factor?
#8. Non-Normal Expectations
Conventional wisdom is often used to describe the “right” level of quota attainment in a sales force. A typical anecdote is: “At least 60% of the sales force should reach or exceed quota.”
Any basic statistics class tells you anything other than a 50/50 distribution of above/below quota achievement is not a normal distribution. If 60% of the sales force is above quota, then the distribution is not normal.
When a company does a great job of setting its annual plan and allocating quotas throughout the sales force, then basic statistics tell us the distribution of actual quota attainment will be normally and tightly distributed 50/50 around 100% of quota.
If a company sets quotas with a uniform amount of stretch across all territories and consistently has 60% of the sales force above quota, then they are under-assigning quotas. This is basic statistics.
The critical question is this: What works best? If a company consistently has 60% of its salesforce above quota, and they perform very close to 100% on the overall sales number year after year, then quota setting is working quite well.
A legendary example of striving for a high percentage of people above quota was IBM during the mainframe era under Buck Rodgers. IBM wanted and often had 70% of salespeople above quota. This meant 70% of the sales force qualified for their “Hundred Percent Club” and were able to attend special annual recognition functions. And, IBM consistently made their numbers in those days. It was a win-win for IBM and the sales force.
#7. Inconsistent Methods
Some sales managers change their quota setting methods from year to year. Here are a few examples:
- One year they ask for bottom-up input during quota setting, and the next year the process is strictly top-down.
- Sometimes quotas are primarily driven by actual results in prior years, but then the process shifts and quotas are set based on market potential.
- The amount of quota over-assignment varies from year to year.
The impact of individual salespeople can be dramatic. One year their quotas are easy, and the next they are impossible. One year they have a good idea of what they will earn, and the following year they have no idea.
As a rule of thumb, the quota setting method should not change more than every three to five years. If you do an excellent job of selecting a set of quota setting methods that are well-aligned with the business strategy, then significant changes in methods should be few and far between.
Think of it this way: sales managers know sales compensation plans should not change every year. The same holds with quota setting methods: they should be reasonably steady over time.
#6. No Modeling
Proclamations to the contrary, there is no single best way to set quotas. If there was, everyone would do it that way. This means that you have to find the best way to set quotas for your sales force and your particular situation. An infinite number of variables are at play in a sales force as it works with customers. Further, each company has a unique sales history and market potential.
Quota modeling is a tried-and-true method of dealing with complexity. Otherwise, managers go about setting quotas willy-nilly and have no idea how their new quotas will impact their salespeople.
Quota setting is well suited to modeling. Historical data can be gathered for each salesperson, including actual sales in total and by product, market share, and quota attainment. Then, it is possible to play “Monday Morning Quarterback” and see which quota setting method provides the most accurate quotas. For example:
- What emphasis on history versus market potential yields the least amount of disruption in past bonus payouts?
- What if we shift the emphasis from one product to another?
- Who are the winners and losers if more weight is placed on market potential?
- What is the estimated amount of sales lost per year due to sales force attrition, and what are the implications for quota over-assignment?
Sales Performance Management (SPM) systems can be used to answer these questions. They help managers find which quota setting method sends the optimal blend of strategic signals to salespeople without creating an untenable amount of sales force disruption.
#5. No Forecasting
Each territory has a unique sales history. Some product lines are rising, and others are falling. Some customers are growing, others are shrinking. Some regions have higher growth rates than others. All of this data is readily available in a sales force, and it is a perfect application for quantitative forecasting. But few companies use modern forecasting techniques during the quota setting process.
There are numerous possible explanations, but they all end up being excuses. Software programs make exponential smoothing and other forecasting methods feasible for any size sales force. Companies can start with simple data sets, and gradually increase complexity and sophistication. They can include forecasts in the testing process described above and prove for themselves that accurate sales forecasts enhance quota setting accuracy.
#4. No Market Potential
Sales forces often fail to use market potential data during the quota setting process. The usual excuse is: “We don’t have market potential data for individual territories and customers.” Well, in the era of Big Data, the correct response to this objection is probably: “Yes, you do.” The only relevant questions are ones like: What can we get for free from government sources? How about trade associations? How do we maintain it?
The benefits of using market potential data in the quota setting process are substantial. Overall market penetration improves, as does a sense of fairness and equity in quota setting. For salespeople with high market share, they do not receive quotas that require an excessive level of market penetration. And for territories with low penetration, these salespeople are needed to crack the code and establish the company’s rightful share of the market.
Sales quotas tend to err on the high side. One common cause is over-optimism. It’s one thing to be hopeful and confident about the future. It’s another to set sales quotas that cannot materialize without a long string of good luck. “Hockey stick” quotas rely on dramatic reversals of fortune and are not credible in the field.
Perceived quota achievability is critical. If salespeople do not view their quotas as feasible, then their compensation plan loses relevance. Overly optimistic quotas tell salespeople there is a low chance they will earn target bonuses, which in turn reduces motivation to work hard and increases the risk of turnover.
#2. Late Quotas
Some companies release sales quotas well after the year has started. In severe cases, quotas don’t materialize until the end of the second quarter! The C-suite must remember: When business planning extends into the first quarter, the sales force is left rudderless.
Business plans contain crucial strategic information and specify how success will be measured in the upcoming year. It should be obvious: If you want salespeople to implement your strategy, then you need to tell them what it is.
Most sales volume comes from your largest accounts, and they usually have the most prolonged sales cycles. So, if you want to achieve your business plan in the current year, then you need your salespeople to start implementing it with your largest customers at the start of the new year. When quotas are late, you significantly reduce your chances of success in the current year.
Most companies have a zero-tolerance policy for payroll: get it out on time, every time, without exception. The same philosophy should apply to quotas: get them out in January (or the first month of the new fiscal year) every year, without exception.
Late quotas are usually retroactive: they cover the full year, not just the remainder. This means salespeople are held accountable for the weeks or months they were forced to fly blind—with no guidance from the control tower. Late quotas undermine trust between the sales force and the company and erode management’s credibility.
The only way to release quotas on time is to complete the business planning cycle in November or December (or the last month or two of the fiscal year). Working backward, create a new planning cycle. Then re-engineer the planning processes as necessary. For example, rather than wait for a full calendar year of data before finalizing the business plan, use a forecast for the last month or two. This in turn may imply you need a higher level of forecasting sophistication and expertise.
#1. Excessive Over-Assignment
Quota over-assignment is probably the single most contentious issue in sales compensation. It is the practice of padding quotas or allocating a larger quota than called for by the business plan. It is a widespread practice. Some surveys indicate that well over 70% of sales managers over-assign and many use over-assignment levels that exceed 20%.
Let’s first address the basic over-assignment math. Five percent over-assignment means that all salesperson quotas add up to 105% of the business plan revenue target. But what if there are five levels in the sales organization (e.g., CSO, VP Sales, Region Manager, District Manager, Sales Territory), and each management level uses 5% over-assignment? Then total quota over-assignment is 28%.
Quota padding makes sense if the corporate sales target is too low. But I’ve never heard sales managers use that as a justification for over-assignment. As we all know, companies rarely set easy business targets. Sandbagging CEOs don’t keep their jobs very long.
Conversely, boards of directors don’t want CEOs to set unrealistically high business targets, either. They know this can demotivate the whole company. So, the safest assumption about business plan revenue targets is that they are “stretch but achievable.” In other words, they are not too hard and not too easy. Over-assignment, therefore, often takes a “stretch but achievable” corporate target and converts it into “super-stretch” and unrealistic quotas for front-line salespeople.
My list of quota setting mistakes comes from working with hundreds of sales compensation plans over the last three decades. For further reference, see my quota setting book, the first ever published on the subject.
My best guess is that most companies make at least one or two of the top ten mistakes every year. How does your company stack up?
More importantly, how much better would your sales group perform if you avoided all 10 of these quota setting mistakes?