Today’s post is by Mark Donnolo, managing partner of SalesGlobe, which helps companies connect sales strategies to the bottom line. He is the author of What Your CEO Needs to Know About Sales Compensation, The Innovative Sale, and Essential Account Planning, which will be published in May 2017.
Years ago, I sat in a smoke-filled room with the head of sales for (ironically) a health insurance company. In between drags on his cigarette, he described how his top sales reps were all leaving the company – not for better incentive plans or a more promising career path, but because of quotas.
“We knock it out of the park and what kind of reward do we get? A bigger quota next year,” he said. It was true. The company had an outdated quota-setting process: they took last year’s performance and added 10 percent, without taking into consideration the market’s appetite for its services or the reps’ capacity.
Most quota problems are not about the number, necessarily. They’re about the process: how executives arrive at the overall revenue goal and how that number is allocated down through the sales organization.
From the results of a recent survey of sales leaders conducted by SalesGlobe, below are the six biggest quota-setting challenges companies face today.
- Quotas are driven by historic information that does not represent the opportunity in the market. The natural tendency of most organizations is to consider recent historic performance of the rep or the team and add something to that. However, planning ahead by looking in the rear-view mirror doesn’t usually account for the true untapped growth opportunity in a territory – or the unrealized capability of the salesperson.
- The quota setting process is not transparent, and people don’t know how their quotas were set. A number comes to the rep on a sheet of paper or by word of mouth without a clear explanation of how it was developed. Sometimes managers and reps think of this as spreading the pain because the overall number may simply be seen as unachievable.
- Quotas create a performance penalty in the next year for high performers. The organization perceives that a good year will be met with an unrealistic growth expectation for the following year. This can be a real hurdle for the rep if some of last year’s great performance came from a sizeable one-time deal that isn’t realistically repeatable year after year.
- The organization doesn’t have an effective process to accurately set quotas. Quotas are often set by some method that’s not seen as accurate or reliable. Whether there is a good process or not, the perception that the process is ineffective can be just as big of an issue.
- The sales organization doesn’t believe in the quota setting process. The organization may have a process. Managers and reps may even be part of the process – giving their “bottom-up” input to what they think is attainable in their territories. However, the mystery is that, no matter how much input the field provides, the number still comes back as if it was a completely top-down decision. Reps and managers wonder why they should bother.
- The organization doesn’t have accurate information to set quotas. The organization would like to set quotas well but the data doesn’t exist or isn’t reliable. This was a more common issue a decade ago but – with ever-improving customer and market data – the possibility of setting good quotas is better than ever.
These challenges all pose risks to a sales organization, including de-motivation of the sales organization, missed growth targets for the business, lower impact of the sales compensation plan, and high sales organization turnover. If not corrected, top performers may lose faith in the organization and seek another role in another company where they can have both the satisfaction and job recognition that come with exceeding their quota – and the financial benefits of being a top performer.
While there are several good quota setting methodologies – and no one-size-fits-all solution – considering the market-based opportunities is always a good place to start. Market opportunity-driven quotas are developed by starting with historic information and building on it based on the characteristics of the market. Market opportunity might consider predictors of potential that indicate how much opportunity might reside in an account. For example, the number of employees at an account 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. And, if your high performers can have success and make money for themselves and the company, chances are better that they’ll stay.
I think many companies dont want to look at reality, just how to increase earnings and profit for their shareholders.
And I can see how a commission based sales person would be really tempted to change jobs to pick up a more reasonable quota make a killing for a couple of years and then move on again.
Luckily for me the company I worked in for the last 15 years of employment had a process where the sales reps prepared their own budgets which was then extensively reviewed by management ... by looking at the market as you suggest.
BTW that company went from $0 at startup (with little to no financial resources) to $50mill/ yr in about 11 years.
Posted by: AussieSalesGuy | 03/15/2017 at 05:03 PM