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Hidden Costs of Inaccurate Quota Setting

By Dave Egloff | February 08, 2021 | 0 Comments

Sales Strategy and Operationssales compensationSales Operations

It’s that time of year where quota setting is consuming mindshare and capacity.  The uncertainty and planning of quotas also cause seller anxiety.  This often results in delayed data entry into CRM systems.  Regardless of how lucrative a compensation plan seems, sellers will tell you that it all comes down to the quota attainability.  In an October 2019 blog called Monetizing Quota Setting Accuracy, I highlighted how to measure the ROI of improving quota accuracy.  The ROI benefits are direct dollars that fall to the bottom-line.  However, indirect costs also arise related to seller engagement and performance management.

Direct Costs Bad Quota Setting

Since most compensation plans accelerate earnings as attainment increases, over-performers are paid more than the corresponding savings from under-performers.  As an example, consider a sales compensation plan with the following alignment:

  • 90% quota attainment pays a seller 90% of their target incentive
  • 110% quota attainment pays a seller 130% of their target incentive

Assuming the sellers’ target incentive is $50k, the under-performer is paid $5k less than their target incentive, while the over-performer is paid $15k more than their target.  If these sellers had the same quota and target incentive, the organization hits their revenue plan but pays more than the on-target expense.

Admittedly, this is a simple example.  However, it is shared to reinforce that quota setting has a financial impact.  Ultimately, you will have sellers under- and over-perform.  In the best-case scenario, seller performance is a direct reflection of their productivity and influence – not quota setting accuracy.

To calculate quota accuracy benefits, model the commission impact as though all sellers performed 1% closer to 100%.  This is a proxy for quotas being set more accurately.  Specifically, recalculate the commission results if:

  • Sellers below 100% achieved 1% better
  • Sellers above 100% achieved 1% worse.

The “1% more accurate” model will likely result in a lower commission expense, all other things being equal.

Indirect Costs Bad Quota Setting

Perhaps a bit more conceptual but imagine how sellers feel when they get a quota that is particularly aggressive – or perhaps less ambitious.  Seller engagement directly impacts their intent to stay within the organization and the level of discretionary effort.

If sellers frustrated by their unattainable quotas decided to leave, not only will the organization have replacement costs, but they have added challenges caused by open territories, weaker pipelines and distracted managers.  These things erode performance elsewhere causing missed opportunities.

Equally as detrimental, a lower discretionary effort ultimately materializes as lower performance.  This decreased effort comes from under-performing sellers who are disengaged – i.e., frustrated that they won’t “hit plan.”  Counterintuitively, over-performers may also disengage.  Assuming their plans were set too low and they hit their earnings cap, sellers in this scenario may be less aggressive until the new year.

As the cliché goes, quota setting is a mix of art and science.  Sometimes this saying is used to inhibit progress and added discipline.  That’s unfortunate.  Quota setting accuracy is consequential and leads to better sales engagement and cost management.

For more information on quota setting, see my related blogs:

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