Don't Forget About Quotas!
By the end of the fiscal year, most sales compensation leaders are feeling good about where they are in the next year's sales incentive plan design process (we hope). The management team is finalizing the design, developing the rollout plan and expressing confidence that the plan is aligned with the strategy.
 
But inevitably, if reps’ incentive pay is based at least in part on attaining their quota, when these plans roll out, the field will not be satisfied until they see their quota.
 
Setting fair and accurate quotas has been the biggest issue in sales compensation for multiple years. Incentive practice research studies run by ZS from 2009–2012 across many industries show one commonality: Quota setting is the No. 1 issue across all industries.
 
It is likely due to lack of time spent on the topic. Anecdotally, companies devote more time and effort to the design of their sales incentive plans than to the setting of their quotas. In some cases, significantly more.
 
Academics and practitioners have also spent significantly less time researching and writing about quota setting than they have about sales compensation. In the past 25 years, approximately 60 academic articles have been published on sales compensation, yet only 10 on quota setting. A quick Google search on “sales compensation” or “sales incentives” brings up around 70 million entries. However, a similar search on “quota setting” or “sales goal setting” brings less than half that amount.
 
For best-in-class companies to set good quotas, four primary elements are necessary to make this happen: 
 
  1. Data: Best-in-class companies use some combination of historical sales and territory opportunity. For a high-repeat-sale environment, historical sales carry a higher weight; for more of a hunter environment, territory opportunity plays a greater role.
  2. Process: Companies that set good quotas establish a sound process to allocate the overall quota down to the salesperson level. Companies use various methods, but the most popular is the weighted index, which allocates a certain portion of the overall quota based on historical sales and the remainder based on territory opportunity.
  3. Analytics: In finalizing a process to set the quotas, analytics will determine which method is best. The two primary analytics are fairness and accuracy. Fairness ensures that no territory is unfairly penalized based simply on its makeup (e.g., territory size, number of prospects, etc.). Accuracy ensures that the goals are set as close to the actual result as possible. Both elements can be tested by setting quotas for a prior period for which the actual results are already known—for example, set quotas for 2013 and compare them to the sales results you already have.
  4. Manager Refinement: While it’s smart to begin the process with a rigorous quantitative approach, you should end it by allowing the managers to make final revisions before they roll out the quotas. This improves buy-in by the manager and also ensures that the process addresses any unique situation not accounted for in the data.
 
How much time do you spend on your quota-setting process as compared to your sales incentive design process?

What tricks have you learned along the way?
 
For more on quotas, check out Chad's workshop at our 2014 Sales Force Productivity Conference: Solving the Toughest Sales Compensation Problem – Setting Good Quotas.
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Chad Albrecht

Chad Albrecht is a Principal at ZS Associates and the leader of the firm's sales compensation practice. A Certified Sales Compensation Professional (CSCP), Chad has 15 years of consulting experience with ZS and Hewitt Associates. He has worked with clients to create and implement motivational sales incentive plans and to set fair and challenging sales quotas. Chad is the author of several articles in publications such as Compensation and Benefits Review, World at Work Journal, Sales and Marketing Management and Workspan, and is a regular speaker on sales compensation topics.

Comments
david shah
Great input,
If some is doing different than what I read here and before.
I do not know.
Only thing is Manager has to have the Market knowledge.
When setting Targets, should keep in mind
1) If some one new big customer is coming in the area or leaving the area.
2) If new competition has come to the area.
3) Is the market saturated or has more potential.
4) If the sales rep has time to cover all Territory or picking big customers only.
5) delivery schedules.
list goes on and on...................
Phil Davis
I love the last comment on Chad's initial post - the one about management refinement - but it scares me to death too...

I can't help but.think about what goes through a local sales manager's head when 'tweaking' quotas for team members. Although we don't like to think it happens, people can and do play favorites

This is where quota setting and plan design intersect - high performing sales forces often put together management incentive plans that pay managers for setting and managing to equally 'fair' (i.e. equally 'tough' quotas). Properly calibrated and in synch with the quota allocation system, this important element in sales management incentive pay helps ensure that managers don't simply ride the coattails of a few high performers.
Kevin Markl
I know of many companies who continue to email Excel spreadsheets back and forth between managers and then rely on sales operations/finance to true up the final numbers against the target set by leadership. This should take days, not months, when using an automated roles based solution.

The other interesting thing we see is all sales reps getting assigned the same quota. There's no reason to do that except that it's too hard to do it the right way (with Excel) instead of an automated Territory & Quota Management tool.
Chad Albrecht
Phil -- great comment. What we have found is that 2 features in the refinement process minimize "playing favorites." The first feature is "zero sum" -- if a manager lowers one person's quota, they have to allocate that reduced amount across the other reps which they are reluctant to do unless it is really warranted. The second feature is requiring a reason. When an adjustment is made, they have to list the reason for the adjustment. This is sometimes linked with the second-line manager's approval.
John Treace
We spend more time on the quota setting process than the incentive design. That is because our incentives awards are stock options and they are based on sales level achievement…higher level awards gain more stock options. Some of the better practices we learned are the following:
1. Announce the award and quota plans at the first of the year and present so all see them as achievable.
2. Have the sales management team in alignment with all quotas and have talk points for all of them to use when they talk to each rep…you don’t want different justifications being made to the sales team.
3. Provide a monthly standing so all can see where they rank in overall performance and do this without giving away who will win the various awards.
4. Make sure quotas are a push but achievable.
5. Have lots of awards so there is the opportunity for many to win vs a few.
6. If the top award is given for a grand vacation and to include the spouse, send notices to the homes of the top five or ten contenders of their position and some reminder as to the resort. This gets the spouse involved and has worked very well for us.
Debbie Delmar
I have an interesting/unique situation. I am a sales manager with 10 direct reports. We have an annual incentive plan which is very hard to work with. You either hit your goal & get a huge bonus or you do not and live in poverty for the next 12 months where you'll get your next shot at the annual goal. My company is CONSTANTLY late in delivering sales quotas.

This year our company decided to change the sales year resulting in a stub year (9 months). So our new sales year ends on March 31st and guess what....we haven't even received our goals yet!!!! So I have been "motivating" my team for the past 8 months when basically we are flying blind! Plus since it's a stub year, if a rep doesn't hit "this imaginary goal", it's will be 15 months since their last bonus payout (this is assuming they hit next year's target). Crazy, isn't it? Should we all be looking for new jobs or what?
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