September 06, 2016
by Mark Donnolo, Managing Partner, SalesGlobe
Every year we ask sales leaders, “What’s your biggest challenge with sales compensation?” and every year we get the same answer: quota setting. Quotas are a hassle for all involved: from the people in finance and sales leadership who set the goals to the frontline sales reps who have to achieve those goals. But, unless you want a Wild West situation in your sales organization, you should probably set quotas, and set them correctly.
Quotas are the allocation of the company’s goal to the business units, sales teams and frontline sales reps. Without quotas, most sales compensation plans won’t work. Given the choice, I’d rather have a good sales compensation design and a good quota-setting process than a phenomenal plan and a bad quota setting process. If we see somebody getting significantly underpaid or significantly overpaid, it’s almost always because someone did a bad job of setting the quota, and has little to do with the plan design.
But one quota-setting approach does not fit all situations. The old “take last year’s goal and add 10 percent” method is usually a bad idea. Quota-setting methodologies vary based on the market and types of accounts.
Below are five standard quota-setting methods and how to determine which will best fit your organization.
1. Flat quotas are simple and effective in the right situations.Organizations often start out this way, or they may use this approach in new markets. Everybody gets the same quota because it is assumed that all opportunities and resources are equal. The flat quota approach is common in new business development situations where reps don’t have an existing base of business to manage and may have few boundaries to their sales opportunities. It’s survival of the fittest.
2. Historic quotas are the most common in companies, yet they create some of the biggest issues by assuming that history is predictive of the future and of potential in a market. This approach creates quotas that recreate history. In a recent survey by SalesGlobe, about 70 percent of companies use a historic quota-setting process. While history is a good starting point, it should be enhanced by turning the attention to future opportunities.
A better version of this quota setting method is historic-modified. This method is best suited for markets where specific account-level data is not available or reliable. It uses the historic growth trend and modifies that trend by differences in market characteristics. Account managers’ quotas are based on historic performance and known characteristics about the market.
Benefits of this method include:
3. Market opportunity-driven quotas are developed by starting with historic information and building on it based on the characteristics of the market. Market opportunity considers indicators of how much opportunity might reside in an account. For example, if you’re selling office chairs, the number of employees at a certain location may be correlated to revenue potential. Those indicators can become part of a larger predictive model that either estimates the potential of a territory or compares that territory with other territories to help allocate the goal correctly across those territories. This approach can be effective for a large number of accounts.
4. Account opportunity-drivenquotas consider characteristics of the accounts as well as the market. By looking at the sources of revenue retention, penetration, and new customer acquisition, and the existing and planned sales pipeline, a sales organization can build the account opportunity components, bottom-up. Those growth estimates can be compared with top-down intelligence on the overall market, and growth predictions. The company can also consider sales capacity and the capabilities of reps to capture that account opportunity.
This method is best suited for markets where specific account-level pipeline data is available and reliable. It incorporates existing revenue, retention, penetration, and acquisition opportunities. Quotas for account managers are based on account knowledge and pipeline planning.
Benefits of this method include:
5. Account planning can be used for growth planning, coaching reps to the plan, and of course, setting quotas for the account. This process is effective in situations where there are a small number of large accounts. The account plan provides information on growth targets in the account as well as tactics the team will use to grow the customer relationship.
By considering and combining these methods your organization can develop a quota-setting approach that matches each type of account segment and can increase the opportunity to hit the company’s overall sales objective.