Quota-based sales incentive compensation plans are growing in popularity. In fact, they're displacing commission-based plans across industries, including high-tech and medical products.
Quota-based plans tend to better account for individual salesperson opportunities and are therefore considered to be fairer than pure commission plans. But their effectiveness depends almost entirely on the accuracy of the individual salesperson's quota.
While setting fair and effective quotas is easier said than done, it's crucial companies take the time to do it right. Unfair or inaccurate sales quotas can lead to a loss of motivation that saps morale and hurts revenue.
According to the 2009 Incentive Practices Research (IPR) study, a recently released multi-industry survey conducted by ZS Associates, sales compensation managers realize the importance of quotas. They rated quota-setting fairness as a top incentive concern, ahead of such issues as pay competitiveness, upside opportunity, and plan simplicity.
Despite this awareness, many companies struggle to set quotas accurately. Fortunately, there are proven strategies they can use to improve quota setting, and in turn, the effectiveness of their incentive compensation plans.
Why Good Quotas Matter
Performance against quota is a salesperson's primary indicator of success. Failure to meet quota indicates they aren't doing their job well. This can result not only in personal disappointment, but also a loss of pay.
Payouts in a quota-based plan are related directly to the percent of quota achieved in a given performance period. If the sales representative hits exactly 100 percent of quota, they receive what is called the "target incentive," or amount earned at expected performance.
Salespeople who sell below 100 percent earn less than the target incentive, while those above 100 percent earn more (sometimes significantly more) than the target incentive.
Performance against quota also affects a salesperson's status in the annual recognition program. This award, which is highly coveted by salespeople, often consists of a public recognition ceremony, a keepsake, and a luxurious trip. A primary determinant of inclusion in these programs for most organizations is performance against quota.
Since quotas have a direct impact on a salesperson's pay and overall sense of accomplishment, quotas that don't align with a salesperson's real sales opportunity, or are otherwise perceived to be unfair, will hurt the organization. They can cause salespeople to leave the organization or give rise to a sales force of underperformers.
Three Steps to Fairness and Accuracy
Companies must walk a fine line when setting individual sales quotas. While quotas that are too high can lead to sales force frustration, quotas that are too low prompt many salespeople to stop working after they surpass their goal.
Both scenarios lead to an unmotivated sales force, and can cut into company profit and revenues. Fortunately, there are three things company executives can do today to improve or revamp their quota-setting processes.
1. Find true territory potential. Sales territories are not created equal, and the relative difference in opportunity impacts how much a salesperson can sell in a particular territory. This difference needs to be taken into account during the quota-setting process.
Those companies setting quotas most effectively use market potential data to gauge a territory's sales potential relative to others. Common sources for this data include Dun and Bradstreet's business-to-business sales data, Nielsen consumer data (note: Nielsen is the parent company of SMM), population and demographic census data, and industry association data sources.
2. Use a rigorous methodology to set quotas. After determining territory potential, the best companies use a data-driven methodology based on rigorous analysis of existing sales data and sales potential in each territory for setting the quota, so as to maximize fairness and accuracy.
While there are many ways to set quota, companies should strive to keep the process consistent. Simply giving the market potential data to field managers without direction will result in that data being used in many different ways—which can confuse salespeople and compromise the effectiveness of the compensation plan.
3. Give managers a voice. Before rolling sales quotas out to the field, companies should give their local managers the opportunity to refine them. Doing this ensures managers buy into the process and agree with the final goals delivered to their sales teams. This is critical, because even the most accurate quotas may face resistance from field managers if they feel left out of the goal-setting process.
Further, there may be legitimate territory-level data discrepancies field managers can (and should) be given the opportunity to correct. Territory potential data used in quota setting may be a few months out of date, or a recent local development may drive the need for an adjustment.
For example, in 2008, Hurricane Ike dealt a severe blow to the Houston area. The manager review process played a vital role in correcting market potential in this instance. Historical market data used by headquarters couldn't account for the impact of the hurricane.
Accepting the Challenge
In today's economy, companies are understandably looking to build the most efficient compensation plans possible. As they consider plan design changes for 2010, they will be looking at all aspects of the incentive plan from total pay level to the slopes of the payout curves. One element they cannot overlook in the process is their quota-setting methods.
Companies often put off updating their quota-setting processes because it is challenging to do it right. Today, however, it is a necessary undertaking.
Companies that improve their processes and strive to provide their field with fair, accurate quotas will see enormous benefits—from improved sales force morale to lower incentive costs and higher overall sales.
Chad Albrecht is an associate principal and a sales compensation practice leader with ZS Associates, a global management consulting firm specializing in sales and marketing consulting, capability building, and outsourcing. He can be reached at firstname.lastname@example.org.