Four Better or Worse Quota Setting Methods
Last week I spoke to a salesperson who was visibly irritated. She had returned from a quota-setting meeting and learned her quota, most likely, would be raised by about eight percent next year. She actually called it a “punishment” for her high performance in 2013. And while she had been invited – as a high performer – to participate in the quota setting process for 2014, she didn’t feel her voice had been heard. The market had changed in her territory, and an eight percent increase didn’t accurately reflect the potential, she said.
It’s a common problem, and of course no salesperson would be a fan of their quota increase. But quotas are important – they are the linchpin between the sales strategy and the sales compensation plan – and they always seem to be reduced to just the number. While the sales compensation process demands months, quota setting is often given one day.
Beyond the number, effective quotas begin with an effective thought process. Let’s take a look at the pros and cons of four common quota-setting methodologies:
1. Flat quotas give everybody the same number; for example, a $3 million annual quota. The assumption is that all opportunities and resources are equal. This type of quota works fine for a startup or when entering a new market, like a foreign country. Flat quotas do not work well when territories are assigned because inequities between market potential start to arise.
2. Historic quotas are the most common. The assumption here is that history predicts the future. But, as we saw with the salesperson I spoke to, history also tends to give out performance penalties. Had a really great year? Fantastic. Don’t forget we’re going to raise your quota 10 percent, so get ready for your really great increase. Salespeople could deliberately reach a certain point in their compensation plan where they’re comfortable with the income, and then stop so they don’t drive next year’s quota too high.
Historic quotas are fairly good for early stage markets, or for markets with high potential. But, it’s important to protect salespeople in particularly competitive or saturated markets.
3. Market opportunity quotas use specific information to understand the market. You can combine this with a historic process and use market opportunities as a modifier, or you can use an approach like this completely on its own.
One of the best uses of this method I’ve seen was in a B2B office products company. They realized they could predict a customer’s office product expenses down to $1,000 per white-collar worker, per year. For example, in the case of a bank, the bank would spend $1,000 per person on office supplies including office furniture, office machines, etc., per year. If the office supply company found out a bank had 100 employees, it could set a quota for $100,000 for that account, roughly. From this, the company could also figure out quotas by industry, through percentage of white collar. For instance, we know that the legal segment is going to have a higher percentage of white collar than manufacturing, for example, further setting quotas.
4. Account opportunity driven quotas are very easy to understand. They consider variations in the market: how are territories different from each other in terms of market share or in terms of growth? They also look at pipeline opportunities and predictors to be able to create a picture of what the future might look like. It’s a very granular approach, and very good if you have a moderate number of accounts that you can get information for, in addition to good pipeline and CRM information.
Successful sales organizations tend to use some combination of these methodologies. You can have both a bottom up and a top down quota process. It’s important to emphasize that quotas go beyond the numbers – the process of how you get to that number is important.
Mark Donnolo is managing partner of SalesGlobe and author of What Your CEO Needs to Know About Sales Compensation and The Innovative Sale.
