With the 2012 Summer Olympics in full swing, we’re getting fed a daily diet of medal counts, amazing feats, disappointing chokes, and a litany of stories about winners and losers. Unlike recreational youth soccer where the bar is set very low and everybody walks away a trophy clutching winner, in the Olympics the bar is set very high and only the top three in the world walk away with a medal. In sales, reps “win” or “lose” based on their results to quota. The Sales Leader plays a key role in setting the bar for rep achievement. Set the “bar” too low and everyone wins (and finance loses ?). If they set the bar too high, then potentially no one wins. Sales Leaders should target about 55% of the sales force reaching or exceeding quota, with the performance spread following a normal bell-shaped curve. This creates a “culture of winners” while at the same time keeping costs of sales in line.
Sounds simple, right? But quotas are contentious. In the clients I’ve worked with over more than 15 years I can only think of a few Sales Leaders that believed their quota programs were working really well. So how should the Chief Sales Executive go about setting quotas? Where should they set the bar? To do this well, Sales Leaders should follow five important steps:
1. Select the right quota methodology. The methodology (or formula) for deriving quotas is well-defined, data driven, and fitting for the type of selling role. For example, a bottom-up account planning based approach is best for Strategic Account Managers, while job-based quotas or algorithms based on market potential are best for Territory Sales Reps.
2. Define and execute the right quota setting & allocating process. Who, when, and what needs to happen in a timely fashion? Sales Leaders should proactively work with their 1st and 2nd Line Management, Finance, and the Executive Team to manage the steps according to a set-back calendar from the start of the new performance period so reps will get their quotas on time.
3. Build in a reasonable amount of over-assignment. What is reasonable? It depends primarily on the growth rate of the business. Slow growth companies typically manage over-assignment between 0% and 5% of Company Plan. Faster growth companies will have 10-15% over-assignment. I’ve seen it as high as 35%. This is extreme.
4. Keep crediting rules as simple as possible. I’ve seen too many companies over-complicate the crediting rules. Quotas and crediting rules should be designed together. A change in crediting rules impacts a reps ability to meet their quota. Minimize the number of “overlay” resources to the bare necessity to manage cost of sales.
5. Over communicate. Quotas should be painfully obvious to the rep. And Sales Leaders should use robust communication methods to explain what the quotas are, how they are derived, and where reps stand throughout the performance period. When quotas are raised, provide clear rationale based on market potential, new products, or investments in the sales force. It’s nearly impossible to over-communicate quotas.
To execute these five steps well, Sales Leaders need help, often in the form of a strong sales strategy and operations team. This team needs access to good market and company data. They need analytical expertise for modeling sales potential at market, account and product levels. They need good process skills to help the Sales Leader lead an effective bottom-up and top-down process for setting and allocating quotas. Quota programs also require effective tracking and reporting systems and governance throughout the year.
It’s a lot of work. This is why so many Sales Leaders take the short cut of simply peanut buttering next year’s growth objective across their reps. But doing this, particularly over time, can lead to a culture of whiners instead of winners. Quotas matter a great deal to each rep. Collectively how they are set shapes the culture of the Sales Force. It is worth the time and investment to develop and manage quota programs correctly. When done so, top performers will excel, core performers will be stretched to do more and low performers will know what they must do to stay on the team.
For more insights on setting the bar to foster the right culture in your sales organization, join 100+ other sales leaders at Alexander Group’s Chief Sales Executive Forum in Palm Beach, FL.TAGS: alexander group, comp design, compensation, growth, quota setting, sales events, sales growth, sales operations
I recently read this in an article from a sales compensation expert, “In high performing sales organizations 50-70% of sales people achieve quota. If your team is significantly above this, it’s possible your quotas are too easy. If more than 50% of your organization cannot achieve quota, you may have a quota setting issue or a larger problem with coverage or sales strategy.”
I’m not a sales compensation expert. How could I be, once I was told by a manager, “Your pay increase will become effective when you are….” I’m still trying to figure that one out 😉
But I’m struggling with this statement. I kind of get it, but I have some problems with it.
As sales leaders, we know it is very unlikely that 100% of our people will make quota. Yet, it’s critical that we make our business plan. As a result, there is usually some level of overassignment. That is, we actually assign more quota, in total, than our business plan. The thinking is, that if we get the balance right–knowing some people will miss achieving their quotas, overall things will work out so that we achieve the business plan.
There’s another principle at play–the stretch goal. Many executives (me included) set stretch goals. We want to see if we can push a little more than we think we can achieve. In some ways, the concept is not dissimilar to overassignment. After all, if we don’t achieve the stretch goal, we probably will achieve the business goal. The thinking around stretch goals is to always challenge us to reach a little further than we think we can achieve.
So I get the concept of having quotas that are slightly higher than our business plan.
But I really struggle with the idea of purposely designing quota assignments with the idea that only 50-70% of our people will attain the goal.
Looking at it differently, we are deliberately designing the quota assignments so that 50% of our people fail!
To make it even worse, remember this was the expected performance for high performing organizations. So good but not great organizations will have a higher failure rate, and mediocre organizations will………well you get the point.
So I’m struggling with understanding this. Why do we want to have a design point were 30-50% of our people will fail.
Since this is coming from a compensation specialist, I suspect there is some weird compensation logic to minimize payouts to people, or to provide a bigger pot to fund the very small numbers that will overachieve. Again, if we are overassigning by so much, it’s unlikely that many, if any people will overachieve–and certainly not by a huge amount.
I know these compensation specialists have all sorts of “interesting mathematical models,” basically oriented around assuring we don’t overcompensate–particularly for less than satisfactory performance. But I don’t get it!
Basically, when we look at the cost/affordability of a sales person, we determine an acceptable “at plan total compensation.” Stated differently, we are saying, “If the sales person achieves their goal, we are ecstatic with paying them $X.”
We build our cost of selling models around this concept of “at plan total compensation,” and, as a result we fund our selling programs based on this assumption.
As we look at developing the compensation schemes, we’re particularly worried about underperformance. We don’t want to pay people to underperform, that is there should be some penalty for underperformance. For example, I recently worked with a client to look at a compensation plan. We believed people under 80% year to date were performing at an unacceptable level, so they were not eligible for variable comp (say commissions) if they were below that threshold.
At the same time management recognized the key issue in this was less a compensation issue and more a performance management issue.
On the overattainment side, since we are dealing with incremental revenue/margin the funding becomes very easy and we can afford accelerators while still lowering Cost Per Order Dollar.
Again, the fundamental principle is we are delighted, even ecstatic to pay our people the total at plan compensation when they achieve plan, simply because it’s what we have budgeted and deemed a reasonable cost of selling. In the ideal case, we would be ecstatic with paying 100% of our people their targeted at plan total compensation, because by doing so, it would mean 100% of them made plan! (Remember, I’m a stretch goal guy, so next year I am going to up their quotas, but that’s just me 😉 )
So when I look at the statement that we purposely design quota assignments expecting only 50-70% of our people will make it and fully expecting–even hoping 30-50% of our people will fail, I’m just dumbfounded!
What are we trying to achieve? Clearly, we are trying to reduce total compensation expense–but what at what cost (both from a financial and people point of view). When we have determined acceptable at plan total compensation, why are we trying to design quota assignments where 3o-50% of the people will fail? Why are we trying to save that money?
What does it mean for the 30-50% that fail to achieve quota, do we terminate them? Are they problem performers, or is their problem that we really trying to undercompensate them?
What does this mean to our ability to attract and recruit talented people? The people we want, high performers will push themselves to achieve, but at the same time they recognize reasonable and unreasonable quota expectations.
Somehow planning for 30-50% failure seems completely the opposite of our responsibilities as managers and leaders. Our job is to maximize the performance of everyone on our teams. We do this by making certain we have the right people in the right roles. We make sure they understand our strategies and priorities. We enable them to execute by providing systems, tools, processes, and training–as well as removing roadblocks to performance. We focus on coaching and developing each of our people–engaging each one of them. We address performance problems as performance problems, not shying away from them. And we compensate people fairly.
I just don’t get it.
Yes I understand we do have to have some overassignment, not everyone will make plan, but is it sound business management to plan for 30-5% of our people to fail? Is this what leadership is about?
Of course, I’m not a compensation expert, so clearly I can’t possibly understand their strange calculus. But can someone help me out, what am I missing? Why is this great management practice?
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