A Better Way to Set Quotas

Too many companies set quotas based on last year’s sales. It’s the wrong way, and we hear it all the time:

“How else would we set quotas if we didn’t just take historic results and project ahead 10%? Can we improve how we do it?”

The answer is yes, and it’s crucial to do so. Quota setting must be a cross-functional process, and sales reps need to see a clear connection between their pay and their performance.

Cross-functional cooperation. Ironically, quota setting is very often controlled by those with the least visibility to the market: for example, the finance team, the folks who love the science of it but don’t know the market and customer. The goal comes down from on high, from the top of the organization, driven by investor expectations or senior management requirements. It then cascades through the organization – an often inequitable division of the pain. This process does not look at market opportunity as much as a sales or marketing-led process would because senior leadership does not have as much visibility into the market. Quota setting should be a cross-functional process that pulls together several different functions including sales, sales operations, finance, and even product management.

Pay and performance connection. Effective quotas demonstrate a connection between pay and performance. Our research and consulting experience tell us that about 60% of companies have at least 40% of reps at or above quota in a normal year. And high performing sales organizations have between 50% and 70% of reps at quota in a typical year. Two years ago, 2009, was an exceptionally tough year for quota attainment. Only 30% of companies had at least 40% of reps at or above quota in 2009.

Reps above quota hit the “excellence level” – usually the 90th percentile level of performance – which should link to the upside accelerators in the plan. The threshold group represents the low performers who are usually at the 10th percentile and below.

Some plans will run a straight line payout from 1% of quota to 100% of quota. Others, which often represent a more performance-oriented culture, will use either a hard threshold or a ramped payout that pays less up to the threshold. This decision often relies on the culture of the organization and the characteristics of the sale and revenue flow for each type of sales role.

The important questions are:

  • How do we set a reasonable stretch goal for the organization based on the market?
  • How do we equitably allocate that goal as quotas to the organization?
  • What portion of our organization do we expect to hit quota?
  • How do we build the sales compensation program to drive performance to those goals?

These questions point us toward a better way to set quotas.

To learn more, visit us at SalesGlobe.com or email mark.donnolo@salesglobe.com. 

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