Sales Compensation

Sales Quotas - Friend or Foe?

Quotas can be a cornerstone of sales management by following rules.

Sales quotas power sales compensation formulas. Getting them right is crucial for a well-functioning incentive plan. But it’s a painful process for first-line managers. They face the same challenges each year: an unreasonable revenue number and a small window of time to allocate the quota. Is there a better approach?

Let’s take the case of a fictional manager, Maria, who complains out loud, “Regardless of the sales projections we submit, these corporate roll-down numbers are always at odds with how we view the local market.” She fumes, “My sellers think it’s all a joke. My best and most seasoned sales rep said to me it’s okay Maria, they never listen to us…get in line…we just have to take it.” Maria opens the spreadsheet and starts to allocate her district sales number, which she estimates to be twice as large as what she was expecting. Under her breath, she murmurs, “What are they thinking? These numbers are going to kill my reps! The most recent year was a nightmare with backorders and supply chain disruptions.” Maria adds, “I am better at guessing lottery ticket numbers!”

Sound familiar?

Here’s the question: Are sales quotas destined to be difficult, frustrating and demoralizing to the sales force? Or are they a necessary sales management tool that should be embraced, improved and made more effective? It’s hard to imagine that any sales leader has a warm and fuzzy feeling about sales quotas.

However, by following some simple rules, sales quotas can take their appropriate role as a valued and important cornerstone of effective sales management.

Why Sales Quotas?

Not all sales organizations use sales quotas. For example, income producers, such as agents and brokers, really don’t need sales quotas to focus attention on results. These jobs are normally paid on straight commissions. Who needs a quota when all pay is at risk? However, most sales organizations use sales quotas for several compelling business reasons.

  • Business Plan Accountability. No guts; no glory. The sales department earns an honorable position by taking on responsibility for achieving the business plan.
  • Productivity Growth. Like any other department, the sales department needs to control costs and improve productivity. The quota system allows sales management to continue to press for increased performance levels.
  • Performance Management. A sound quota system gives sales management the tools to manage individual performance, thus setting performance standards. It also allows sales management to equalize the performance measurement among different-sized sales territories to reflect true seller efforts, which may not be accurately reflected by absolute revenue production numbers.
  • Reward System. Finally, most sales rewards systems, such as incentive payments, president’s clubs and promotions, use quota performance to provide exceptional rewards to best performers and a stark message to poor performers.

 Sales quotas are a good thing. The challenge is how to make them work for you not against you and your sales team.

Some Terminology

Let’s review some basic terms and definitions to help clarify our observations about sales quotas.

  • Sales forecast is a single number provided to the sales department for the coming year. The number is usually prepared by finance and product management. Get this number wrong and everything that follows is thrown off track. Sales forecasting is the ongoing process of estimating sales mid-performance period. (Yep, it’s a bit confusing. Sales forecast is a single annual number; sales forecasting is ongoing sales estimating throughout the year). These midyear estimates are often referred to as sales projections.
  • Quota allocation is the process of dividing the sales forecast and allocating it to individual sales personnel. Many sales managers refer to this process as “setting quotas.”
  • Sales quotas are the sales objective assigned to the salesperson. Sometimes, this number is called a sales target.
  • Quota practices are the rules related to sales crediting and crediting adjustments.
  • Quota management is the ongoing process of adjustments to individual sales quotas throughout the year due to territory, personnel, account and market changes.

Sales Quotas Produce Noise—They Are Supposed to

Back to Maria for a minute. Wouldn’t it be great if she had a quota allocation system, which was easy to administer, well-liked and free of conflict? While it’s a great ambition, it’s not likely to occur. The sales department is responsible for achieving the company’s business plan. Sales quotas require “active discourse,” i.e., great quota systems feature performance judgments, challenges and compromises. The process helps find the right balance of stretch performance—goals that are not so hard they demoralize, but not too easy to be a walkover. The outcome of all these swirling factors is to cause noise from all parties…and correctly so. It’s part of the process.

Rules for Effective Sales Quotas

The following rules will bring some semblance to your quota system. Most likely, you will not be able to always follow all the suggestions, but the ones you can implement will dramatically help clean up an unnecessarily troubled quota program.

  • Sales Forecast. If the annual sales forecast is wrong, all the downstream efforts are in jeopardy. Sales management must be an active participant in the annual sales forecast process. They should not sit on the sidelines waiting for a number to appear from finance or marketing. Invest in sales-driven customer research. Build a field data collection and verification process for assembling a credible sales forecast. Then, sit at the table with finance and marketing as an equal partner to help set next year’s sales forecast.
  • Quota Allocation. Use advanced analytics to size market opportunities and territory potential. Engage sales personnel in the process of confirming their estimates of low, expected and best performance. For major accounts, rely on the account manager’s business plan to establish a reasonable goal. For territory reps with hundreds of potential accounts, use algorithms to set quotas. Invest in data systems that report information with high accuracy at the territory level. Recognize that under assignment of the sales forecast (“breakage”) and over assignment (“protection”) are admissions of broken systems. Quarantine “quota disrupters.” For example, do not put new products into the annual quota. Instead, use a spiff or sales campaign to launch new products.  During the next period, roll in the new product with its known and realistic volume expectations. Likewise, cap sales credit and payouts for large lumpy mega orders to avoid unexpected quota blowouts. For selling situations where annual sales forecasts are unreliable, use one of the following techniques: 1) shorten the performance period to improve projection reliability, 2) use a rolling quota of the last three months to set the next month’s number, or 3) count events such as contract signings to measure performance.
  • Quota Practices. Make sure sales crediting rules are airtight. Test every sales situation to specify the right sales crediting practice. Pay close attention to horizontal crediting (often called “double crediting”) where more than one seller gets credit for a sale. Be explicit when horizontal crediting is acceptable and specify the sales credit split. Do not leave such decisions to field manager discretion; the outcome is often undermined by personal bias and politics. Specify how account assignment changes affect quotas.  Monitor all account moves closely to preclude abuses. Clearly state crediting rules related to employment status: new hires, promotions, terminations and job assignment changes. In a nutshell, make sure all sales crediting practices are fully documented in the sales compensation plan. Most litigation related to sales compensation plans are errors, misapplication and policy contradictions related to sales crediting.
  • Quota Management. Here is a bit of advice regarding midyear quota changes: If you can, avoid making midyear changes. However, if your company experiences frequent disruptions that negate the annual sales forecast, consider putting “correction triggers” in your quota policy. For example, if less than 30% of sales personnel are achieving year-to-date performance, then quotas will be reexamined. Likewise, if over 80% of sales personnel are exceeding quotas on a year-to-date basis, then quotas will also be reexamined for possible adjustments. For territory specific and local issues, have very explicit rules when quotas can be changed. Set the bar high. For example, “No quotas will be changed unless conditions outside the influence of the sales representative will affect at least 20% of the business.” Finally, to put a stop to excessive quota relief, institute a zero-sum policy where no quota relief can be granted unless quota reassignment is made to offset the reduced quota.
  • Timing. Pull a task force together to ensure quotas assignments occur in a timely fashion. Usually, “waiting till the last minute” is the source of late quotas. Set up a schedule of actions and accountabilities. Have weekly meetings to review progress and correct actions to ensure timeliness of quota allocations. Publish a weekly summary of progress by accountable parties and specify next action steps.

Follow these rules and practices and next year, maybe Maria will have higher confidence that every effort is being made to make the program fair and disciplined. She and her reps will appreciate your efforts to improve quota setting.

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David Cichelli is a revenue growth advisor for the Alexander Group. Connect with him on LinkedIn.

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