It’s the start of a new year; you just finalized and communicated sales quotas. Now you can sit back and watch the results come in, correct? If only it were that easy. How good are you (and your team) at setting quotas for the sales force? There are many factors that influence sales results and quota attainment. Success begins with setting the right goals. Unfortunately this is an area of chronic pain for sales reps and leaders. Most leaders are not confident they will hit their plan, and in fact, most sales reps miss their plan. According to the research in our annual Sales Compensation Practices Survey, less than 15% of sales leaders are highly confident in their team’s ability to hit sales projections, and less than 50% of sales reps hit or exceeded their goals in 2013.
What is at the root of this challenge, and what can you do about it? Our research and experience suggests when it comes to setting quotas, there are a few specific rep populations that require particular attention. Despite good intentions, the process sometimes ‘goes bad’ for these populations of the sales force. A quick program audit can determine if this is true for your sales force. The three groups in particular to watch for are:
1. Young guns and seasoned veterans
Tenure typically plays a role in a sales rep’s ability to sell and meet targets. Experience and exposure to your company’s products, services and sales process breeds success. It’s the company’s job, however, to set targets fairly—stretch but achievable—for all of its populations, regardless of tenure. If young guns ‘earning their stripes’ are systematically underperforming (as a percent of goal) their seasoned veteran counterparts, your quota program may be artificially creating winners and losers.
A common way to effectively develop and motivate young guns is to give them a ramping quota. The duration of the ramp will depend on the length of the sales cycle and the complexity of the sales. Typical ramp time is between six and twelve months but should in general be no longer than 18 months.
With seasoned veterans, be on the lookout for sand-bagging. During the bottom-up goal setting process (assuming you conduct this), seasoned veterans have a tendency to underestimate the potential of their territory in an effort to make hitting next year’s goals easier. Some level of “sand-bagging” is common, but it tends to be more prevalent with the seasoned veterans. Conducting a thorough bottom-up account planning and goal setting process is the best way to mitigate this behavior.
2. Emerging product and market trailblazers
Setting goals for new products or new markets is inherently challenging. With little to no historical data and often limited market intelligence, it can seem like a guessing game. Guess too high and reps lose – morale suffers and good reps leave. Guess too low and you risk blowing out quotas. The graphs below tell a common story of consistently high quota achievement in a core market (in this case, North America) and consistently poor attainment in a new market (EMEA).
To limit the negative impact of guessing too low or high, apply a few of the following tactics: (1) set longer pay and performance periods (e.g., annual vs. quarterly targets) to smooth out any short-term fluctuations in performance, (2) set quotas at a level where sales revenue brought in by the sales rep covers the cost of the sales rep – i.e., cost-based quotas or (3) provide sales reps with a commission rate (instead of guessing at a target) for each incremental sale. You may have to limit or even eliminate accelerated rates above quota. All three tactics limit your exposure to risk associated with uncertainty.
Fig. 1: Systematically below target performance in EMEA compared to NA across two years of data. All individuals below the 100% line have not met quota.
3. ‘Big-number’ reps
The law of large numbers means it’s hard to significantly exceed a big quota compared to a small quota. Consider the effort required to grow a $5 million territory by 10 percent vs. a $50 million territory by 10 percent. If your organization applies a one-size-fits-all approach, or “fair share” approach to annual quota increases (e.g., apply a flat percent growth over last year’s results), you may be systematically creating winners and losers through your quota program; and your most successful reps and those with the biggest quotas may suffer the most. Recognize the difficulty in overachieving on a larger number, and set quotas for these reps based on an account planning and bottom-up goal setting approach as mentioned earlier. Discuss key inputs to next year’s quotas with the sales rep, including: expected customer churn and renewal rates, big deals in the pipeline, competitive displacement opportunities, and general health of their territory. These discussions with each of your ‘big number’ reps will allow you to have greater confidence in setting realistic targets for these reps. The discussions also go a long way in creating buy-in from the sales reps because they are actively involved in shaping their goals.
Safeguarding against misallocation
Monitoring performance to identify these populations in your sales force is the first step toward isolating and solving the problem of misallocation. Simple measures like ramping goals for junior sales reps and detailed account planning with sellers managing few but large accounts will ensure the goals are as close to stretch but as achievable as possible. When setting targets or new products or emerging markets, keep it simple and consider cost-based quotas or flat commission rates. Lastly, tailor your quota-setting process and allocation (e.g., top-down simple increase, bottom-up sales potential, account planning, fair / modified fair share, or a hybrid version of one of the above) based on account-level knowledge, historical data and management judgment.
To learn more about some quick diagnostics and comprehensive quota program allocation audits and methodologies, please visit the Alexander Group’s Sales Quotas practice.