You’ve developed your business plan and put the new sales compensation plan in place. You’re almost ready to go except for one thing… setting quotas for the sales organization. Quotas are an often-overlooked critical link between the sales force and your business objectives. Too often organizations spend a lot of time building the plan and the compensation program and then quickly set the quotas to be ready for the next year or the next quarter.
A Bad Quota Can Kill a Great Sales Compensation Plan
Many companies wait until the last moment or simply rely on historic performance or apply a “one size fits all” approach to setting quotas rather than understanding the true growth potential of accounts and the market. The result? Over 30% of companies don’t have their sales quotas ready in the first month of their fiscal year, almost half of companies end up adjusting quotas during the year, and many reps carry an unrealistic load. Why does this happen?
· Quotas Are Often a Last Moment Priority. The organization has invested time, energy, and resources in creating its sales strategy and the new sales compensation plan and has little energy, time, or tolerance left for developing market-based quotas.
· Ownership of the Quota Process May be in the Wrong Hands. Quotas may not be clearly owned in the organization with split accountability from the sales organization, sales operations, or finance. Often the organization that owns the quotas, like finance, is farthest from the market has and the least knowledge about market opportunity and sales organization capability.
· The Organization Lacks the Right Information or a Consistent Methodology. Setting and allocating accurate quotas can be downright confusing and difficult without a logical methodology or information on addressable market opportunity. It’s a lot easier (but in the end more costly) to just evenly spread the goal across the sales force.
Quotas are frequently developed by traditional methods that consider only what the company wants, rather than the true market opportunity and sales force capability. Too often they are assigned after the start of the year (and after reps have worked for a few months on the new sales compensation plan) and then are tinkered with during the year. The results of not developing market-based quotas can include erratically allocated and inequitable goals, missed corporate growth objectives, overpayment and high compensation costs, and a de-motivated sales force that eventually dismisses the strategy and the comp plan.
Instead of overlooking it, companies need to seriously scrutinize their quota system and its ties to compensation and effectiveness. When the field is not selling as forecasted, the reason could lie with quota issues like allocation, goal equity, achievability, performance penalties, adjustments, and perhaps most important, market responsiveness. The problem is sometimes that quotas are being set top-down instead of bottom-up. They reflect what the company wants, rather than what the market will bear.
The challenge is to recognize the cause and effect relationship between quotas and results and develop quotas around market opportunity. Then make sure those quotas complement the compensation plan and are programmed to create sales effectiveness.
What Are We Looking For?
Well-designed quotas should strike the right balance between meeting the company’s objectives and creating a realistic, yet challenging goal for the rep. Pushed too far in the company’s favor, quotas become wishful thinking on the part of the company and unattainable or unrewarding on the part of the sales organization. Pushed too far in the rep’s favor, quotas become walk-over goals and deliver excessive pay and high costs to the company.
If quotas are effectively set and allocated about 60% to 70% of reps should reach quota or above. The overall performance distribution should be fairly symmetrical with about 10% of reps at the excellence or high-performance level and about 90% achieving at least threshold or minimal performance.
A review of your organization’s historic quota attainment will show whether you fall into this range or if your performance is skewed toward low or high performance, or perhaps bi-modal with pockets of extreme under-performance and over-performance.
Sometimes companies simply outstrip their sales organization’s ability to grow with ever increasing expectations without requisite increases in sales productivity. Over the past several years, sales organizations have pushed annual quota increases, on a per-rep basis, 50% to 70% faster than compensation. So reps are required to do more for less, organizations are not attaining the necessary productivity gains from reps, and both groups fall short. From an initial view of organization quota performance, you can delve into further quota forensics to uncover the true drivers of your quota attainment issues. These could be:
· Issues with the quota setting and quota allocation process.
· Issues with the sales compensation program.
· Issues with core sales productivity and consistently improving the capabilities of reps.
Putting Quotas in Context
How do you ensure a tight and well-integrated alignment between all key components of sales performance? Since market factors and business strategy drive sales execution, incentive compensation and quotas, must work within a broader sales management context:
Growth Strategy. Clearly defining the strategy in terms of components that are actionable by the sales channels and the sales organization. These include market targeting, value proposition, tactical strategy, and growth plan by each component of the strategy.
Customer Alignment. Aligning the most effective sales channels to each customer segment, strategy, and sales process component to optimize sales effectiveness and cost effectiveness.
Sales Support. Enabling the sales strategy and coverage plan through incentive programs, quota setting, development, and sales tools.
Evaluation and Interpretation. Gaining a clear understanding of internal performance, market environment, and competitor performance, and taking appropriate actions to stay on-course with the strategy.
To be effective, quota setting and allocation must reflect the organization’s decisions in each of these areas including sales strategy, sales coverage, deployment, and compensation. Too often, the company growth goal is driven by sources that may be unrelated to market opportunity. Objectives may arise from the expectations of analysts and investors, or from business requirements or management objectives. Growth projections are then cascaded down to business units and the field, but the quotas are not grounded in market opportunity. Consequently, quotas are adjusted and re-adjusted during the year.
Traditional approaches to quota setting tend to address design from the company’s perspective.
In a fixed allocation method, flat targets are established for all members of the sales team. This simple process is effective for undifferentiated or open selling environments. It can also work well for start-up companies and for sales teams with similar levels of skills and experience. Unfortunately it does not consider territory potential, nor is it responsive to market opportunity. Consequently fixed allocation can potentially create a bonus for reps in territories with the highest untapped potential or for those with the largest existing accounts.
Historic allocation is another simple, company-focused approach, which can, over time, de-motivate high performing reps. This approach allocates quotas on a pro-rata basis reflecting prior year’s performance. Each quota is ratcheted up by a fixed percentage regardless of market opportunity. Companies just starting up or facing a wide-open market can use this approach effectively. Sales reps in heavily penetrated territories may be penalized when quotas climb out of proportion to market potential.
Account planning is a traditional approach that is highly market-focused although on just a handful of accounts. Account planning incorporates an account by account analysis of individual customers or prospects by focusing on characteristics of opportunity, such as current market position, decision makers, competitors, product opportunities, business issues, action plans, team roles and expected results. Account planning is an effective approach for a small group of large or complex accounts. Companies often reserve this level of scrutiny and planning for top global, national, or major accounts. However, extending this approach to a large number of accounts in each territory becomes unwieldy.
Market-driven quotas incorporate elements of account planning but on a broader scale. Often including twenty five or more accounts in a territory, market-based quotas are driven by an estimate of true market opportunity. They meet the principles of quota setting and use bottom-up, account level information to reconcile at the regional, national, or global level. A market-based quota balances relative market share with other differentiating characteristics, such as rep experience, competitive intensity, and market growth rate.
Growth capability identifies an organization’s potential for organic sales growth based on internal strengths in a certain market environment. All the components of the company’s sales model combine to determine and enhance growth capability. The goal is to find the intersection of market opportunity and growth capability.
Market opportunity takes into account elements of sizing, segmentation, and targeting. It starts with an analysis of total market opportunity, considers what is actually accessible given product offerings, existing locations and asset infrastructure and then determines the sales potential in designated markets for target segments. At the same time, elements of sales capability—including resource alignment to target segments, sales workload and duration, hit rates, staffing levels, and sales competencies—are balanced against the market opportunity. The result is a growth objective that is attainable given market factors and sales capability.
5 Principles for Effective Quota Setting
1. Fully allocate the company goal to all sales resources and understand your true cost of sales given multiple crediting, sales overlays, channels, and over-allocations. Typically, the goal should be over-allocated by 3% to 4% to account for variations in individual and business unit performance
2. Ground the quotas in market realities. Know your addressable opportunity for customer retention, penetration, and acquisition. If you cannot incorporate specific account data on sales potential, use reliable forward-looking indicators to modify historic information.
3. Make sure quotas are perceived as fair, equitable, and achievable. If they’re too high, they turn off the sales force. If they’re too low they can turn off profits. Optimally, quotas should provide a challenge but also be within reach given a solid sales plan and sales force capabilities.
4. Consider all factors that affect individual quotas, both external factors, such as market opportunity and rate of market growth as well as internal factors such as rep experience and capabilities.
5. Reflect Rep Input in Quotas. Design systems that are easily communicated and readily understandable by the sales force. A rep will work hard to achieve a difficult quota that she understands but will give up on the same quota if it is not understood.
Capturing Opportunity and Taking the Next Step
In the past, estimating market potential was a guess at best. Companies lacked concrete data about customers, prospects and competitors. Today, however, volumes of information are available from a variety of sources. The richness of market and customer data coupled with improved analytical capabilities and data tools make determining market potential practical. The key is to identify the critical drivers and determine the relationships between them that predict true potential.
For example, a company might determine a customer’s or prospect’s potential through a regression analysis that considers the number of white collar workers, personal computers, and square feet of office space. This would result in a predictive model that could be applied to the universe of customer and prospect accounts territory by territory. Next, the organization might consider factors such as the mix of current and new offerings, the balance between acquiring new accounts, penetrating current customers, and retaining them, and finally the actual capability of the sales organization. Balancing potential with organization capability yields a goal that reflects both market opportunity and the organization’s readiness to capture it.
Amid the details, it is crucial to ensure that the process meets the tests of:
· Receiving adequate time and resources to conduct the process properly.
· Being understood by management and reps- a block box solution won’t work.
· Including management and reps in the process from a bottom-up and top-down perspective.
· Incorporating relevant and accurate information.
· Being evaluated and adjusted to improve performance and accuracy.
Companies that understand the importance of their quota setting and allocation process and strengthen this link to sales performance usually find a new source of sales productivity improvement. Audit your quota process, consider its effect on productivity, and take the first step toward getting extra traction from your sales organization.
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