Quota Conundrum: Why Is It So Hard?
The Quota Conundrum
I have interviewed many salespeople over the years, and when the discussion gets to quotas, I can pretty much predict with 100% certainty that one or more of these answers will come up:
- “I have no idea how they came up with my number, and the overall growth percentage is 3 times what we have typically grown…”
- “I have no say in what my growth expectation is for next year – My estimate and their estimate are very different – but no one asked me…”
- “I did not get my annual quota until 3 months (or more) into the year – Makes me feel like the number is manipulated and they don’t know what they’re doing…”
- “Last year, all the executives went on the President’s Club trip while barely anyone from the field did…we noticed…”
- “I don’t really pay attention to my number, just going to do what I can do…”
So much attention is often paid to the sales compensation plans, the pay mix, the measures, the mechanics, and the rollout. However, a vast majority of incentive plans have some sort of quota expectation attached – If that expectation is off, it doesn’t matter how well the compensation program is structured. You will not get the desired motivational impact, most likely, the following will happen:
- Reps “give up” from the start, or leave in search of greener pastures where they can make their incentive target (turnover can cost 2-3X a rep’s total comp)
- Management and leadership credibility is compromised, undermining trust and representative commitment
- Significant underpayment (or overpayment) that negatively impacts earnings forecast accuracy and stock price if a public company
No one is saying quota setting is easy – it’s part art, part science – let’s dive a bit deeper into what can at least set the stage for a successful outcome. We will look at this from a macro and micro level and touch on the importance of communication – selling the quotas to the salespeople!
MACRO LEVEL
Quota setting often starts with the Finance function setting the macro level growth expectation. That team needs to take into account a number of factors in an environment with a number of moving pieces, including (in no particular order): New product/service offerings coming out or being discontinued, new alliances or distributors, expected price increases, company growth/decline trends, competitive activity and growth, sales headcount expectations, and the general economic climate, often in disparate markets – I did say quota setting is never easy!
Assuming that most of the data above is accessible and up to date, here are two mistakes I have seen repeatedly:
- Irrational Exuberance – The first can be described as “irrational exuberance” – What I mean is that after analyzing the various factors listed above, Finance sets an overall growth expectation that does not have a basis in reality – I have heard more than once the following answer to the simple question of where the macro level growth figure came from; “We set the overall growth target at 12% because our CEO wanted to tell the board we are going to have double digit growth.”
This is when through our own analysis we discover that the organization has never a sales growth rate higher than 3% in the previous decade, and there are no new products, no new markets being entered, or anything that would indicate the growth rate will be substantially different…
- Overallocation – The second is in Finance’s and sales leadership’s overallocation policy, meaning how much more of the macro level number ends up being allocated downward into the various layers of the sales organization. I often see a tendency to be aggressive as percentages are added at each level of the organization, resulting in a substantial difference -e.g., 20%+ – between the macro level figure leadership has committed to and what has been allocated to the sales team(s) if you add up their individual quotas.
It is relatively common to have some overallocation to account for expected territory vacancies, etc. Typical practice is somewhere between 5-10%. The danger lies in going higher than 10% which is when you can end up with loss of buy-in from the sales force and situations like the company making its number, the entire leadership team going on the President’s Club trip, and the field sales team frozen out…Believe me, they notice.
MICRO LEVEL
The next challenge is to finalize the micro level number to the various geographic regions, districts, and individual sales territories/account assignments – These should in theory add up to that macro level number…There are a variety of ways to conduct that exercise and each has its own pros and cons you can combine! – Some of the most common approaches are outlined below.
| Approach | Pros | Cons | Comments |
|---|---|---|---|
| Flat – Everyone gets the same percentage increase over last year or the same $ quota | Simple Fast |
Does not account for factors that differentiate sales opportunities between accounts, territories, or markets | Common approach for Business Development / Hunter roles Watch Out – Setting an aggressive payout curve for performance above quota |
| Historical – Set quotas based on past results and growth/decline trajectory to predict future | Simple Data driven Relatively Fast Can apply same logic to broad swath of account |
Does not account for future sales potential or recent account developments that do not show up in the data | Watch Out – Can reward low performers and penalize top performers Doesn’t account for future sales potential |
| Opportunity Forecast – Set quotas based on analyzing the sales pipeline and forecasts the opportunities expected to close | Data driven | Prone to inaccurate assumptions and data – e.g., probability and timing of deal closings | Watch Out – Requires mature sales pipeline processes and accurate data (often not available). On its own, does not account for opportunity not already in the pipeline. |
| Individual Account Planning – Set quotas based on sales team input on future sales expectations within specific accounts | Captures “intelligence” in addition to pure data – meaning account specific elements such as investments, expansion plans, new product launches, etc. | The most time and resource intensive approach | Watch Out – Sandbagging. First line sales management should be trained on what to look for and the questions to ask in individual discussions with direct reports. |
In my experience, the optimal approach combines a thorough macro level growth exercise with the “Account Planning” approach, also called “bottoms-up.” It involves going beyond the immediate data to capture the customer and market intelligence, which usually resides with the salesperson covering the accounts (their direct manager should also have some awareness). Of course, it is also the most time-consuming approach and needs a lot of planning to execute well. Keep in mind, you can mix and match approaches and if there a lot of accounts, taking this approach just to those that represent a high percentage of volume can still be helpful!
What do you do when the micro and macro level numbers don’t match? This depends a bit on how wide the gap is. If relatively wide, some discussions and negotiations may be in order to flex the top-line number. The direct manager of the salesperson should have already pressure tested the salesperson’s forecast. Salespeople do have a tendency to understate numbers to drive the best outcome for themselves, but a good manager who is well equipped with data and market/account knowledge can ask the right questions, challenge assumptions, and uncover any sandbagging tendencies.
ROLLOUT
There is nothing more disheartening than when I ask the question about how sales compensation plans and quotas have been communicated in the past, and the answer is “we sent out an e-mail and a link to the documentation and number.” Quotas generally need to be sold to the sales force. From my perspective, that includes covering the following in one-on-one conversations or small group sessions (ideally); 
- Process – Description of the process and who was involved
- Macro Level Overview – Overview of how macro level figures were calculated, including assumptions
- Strategy and Goals – Confirmation of company strategy and goals
- Micro Level Overview – Description of how the team member’s sales quota was determined
- How to Win – Discussion of how the team members can reach their quota for the year to strengthen buy-in to feasibility
Support all of the above with” Frequently Asked Questions” documentation, “train the trainer” materials, visuals, and a summary of key points on how to succeed.
SUMMARY
In summary, quota setting is one of the most difficult business-related exercises for finance, sales operations, and sales leadership. Ideally, it involves a combination of macro and account specific analysis, individual discussions and negotiations, and a bit of guesswork and luck as to what the year ahead will bring. Other success factors include having a sober outlook about what is really feasible and spending time with the sales team to explain the process for how the quotas were determined and outlining how they can successfully achieve and exceed what is expected of them!
SalesGlobe is a leading sales effectiveness and data-driven creative problem-solving firm. We specialize in helping Global 1000 companies solve their toughest growth challenges and helping them think in new ways to develop more effective solutions in the areas of sales strategy, sales organization, sales process, sales compensation, and quotas. We wrote the books on sales innovation with The Innovative Sale, What Your CEO Needs to Know About Sales Compensation, and Quotas! Design Thinking to Solve Your Biggest Sales Challenge.
Senior Director at SalesGlobe
Management consultant focused on helping clients create effective sales organizations
