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:
- 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.
- 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.
- 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.
- 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.
About the Author
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.