Every year we do a survey of the top sales compensation challenges companies face. And every year – consistently – quota setting is the number one problem.
You could argue that quotas aren’t even part of the compensation plan. In fact, we set quotas after the plan is complete. But quotas are really the linchpin between the compensation plan and performance. You could have a very effective compensation plan, but if you don’t have effective quotas, it can derail the entire plan.
Below are three common mistakes to avoid as your plan for next year:
1. Don’t have your quotas ready. In our most recent survey, about 30% of companies did not have their quotas ready by month one. In fact, quotas actually may not be ready in the first quarter of the year. A lot of times, this is because the numbers aren’t available from finance until the end of the year and the quota setting process can’t begin until those numbers are ready. This also leads to a rush-job of quota setting.
2. Adjust quotas mid-year. Because too often we rush through quota setting, and for a variety of other reasons, about half of companies will adjust quotas during the year. Sometimes there are valid reasons to adjust quotas: if there’s a major change in the market or your production capabilities, for example. Some companies, however, adjust quotas mid-year to manage pay, which, in our opinion, is usually not a great idea. When making quota adjustments it’s very important to have policies set ahead of time for why you would make those changes.
3. Base quotas on historic performance only. When quotas aren’t set correctly they don’t reflect actual market opportunity. Instead, they tend to be historic – just add a certain percent to last year’s quota. A better method combines a bottom-up perspective from the front line, assessing real market potential, with a top-down perspective on what needs to be sold in order to achieve the company’s revenue goals.
Effective quota setting is critical for the sales organization. Ultimately, the implications of an ongoing quota process that’s not working well can be misalignment of goals to markets and misalignment of opportunities and also eventually missing goals year after year. No wonder this is a challenge area year after year.