Does anyone enjoy setting sales quotas? I think not. The common expression is that quota setting is a mix of art and science. This might be true, but it’s also a mix of frustration and distress.
The impact of quota setting cannot be understated. When it goes well, organizations manage costs and communicate a fair target to sellers to level-set expectations. When it goes poorly, sellers become disengaged – or even leave the company – because goals are set unrealistically high. Or, if goals are set too low, organizations end up spending far more than expected in commissions – driving up the costs of sale.
Here are five common questions asked about quota setting:
1) What are the symptoms of poor quota setting?
First, look at seller engagement. If many sellers complain about unfair goals, you might have an issue. Certainly, it’s fairly common for sellers to lobby for a lower goal. However, throughout the year, if many sellers are tracking below plan, the CSO and CFO may need to take action. Beyond seller perceptions of fairness, quota issues create problems with commission expense. If performance is flat, but expenses are rising, quotas might be the culprit.
2) Who should set and allocate sales quotas?
Finance is commonly responsible for setting top-line targets. Sales leaders are responsible for cascading or allocating the quotas to individual sellers. In some progressive organizations, quota setting and allocation are a team sport that includes sales leaders, Finance and Sales Operations.
3) How can we get better?
Setting sales quotas is a complex process often constrained by time and exacerbated by data issues, operational mistakes and bias. To mitigate these issues, CSOs should encourage a triangulated approach. Leveraging the expertise across sales leaders, Sales Operations and Finance improves accuracy.
Practically, sales leaders should start the process as early as possible. Plus, Sales Operations should help to improve decision making and reveal hidden insights using advanced analytics tools. Note, Sales Operations are in the best position to address data and operational issues.
4) How can we set quotas more quickly?
Many factors lead to the final, top-line quota. Prior year final performance, headcount/ investment planning, macro-economic conditions, etc. all influence the final sales targets. While these variables are being settled, sales leaders should preemptively create a bottom-up model. This model – also called a “quota build” – may not immediately reconcile with Finance but will pave the way for a quicker process once Finance delivers the official top-line targets.
5) Should quota setting accuracy impact sales compensation plan design?
Absolutely! Quota accuracy influences many aspects of the sales compensation plan design – performance metric selection and pay curves immediately come to mind. As an example, Total Contract Value is often challenging to get right. Quota setting models need to account for the count, size and length of deals. Alternatively, to simplify the number of variables, Annualized Contract Value should be considered. Note, if sellers need incentives to promote longer deals, rate accelerators can be used.
Regarding pay curves, sales compensation plans should be designed with flatter pay curves and avoid larger threshold bonuses (i.e. bonuses that are earned at specific attainments) when quota setting accuracy is an issue.
Finally, many other factors influence quota setting accuracy including:
- Sales reorganization
- Territory redesigns or named account reassignments
- New product launches
- Geographic or vertical expansion
- Macroeconomic or geopolitical issues
Many of these variables are not entirely controllable, so recognizing external factors may provide some solace. Equally, CSOs should explore non-quota based incentives when external or unavoidable factors are continually at the root cause of the issues. However, when issues are controllable, CSOs will likely find it a worthwhile investment to get right. With more accurate quotas, seller engagement and commission expense improve even on the same overall sales performance. That’s a pretty high ROI.