If your sales organization is like most, you have a sales goal assigned to your sellers. The sales quota is an integral part of the sales compensation plan design and when done right, aligns the sales organization with the company’s strategic direction.
The quota serves as a yardstick for performance of the various job roles in your company. It is how you track excellence performance, how you reward the sales organization for work that is done, how you encourage the team to deliver beyond their quota.
The actual quota numbers should be tied directly to the company’s goal. These numbers should have been determined based on a realistic stretch in each territory, aggressive yet realistic is the key. When the quotas are developed with best practices in mind there is real opportunity for the sales person to achieve the quota. If each person on your sales team believes they can achieve their assigned goal that’s a huge boost to the team’s motivation and motivated teams sell more! Yet, about 40% of the sales people fail to meet their sales quota based on a survey by CSO Insights. From what I see that number is optimistic. To make matters worse, companies have little confidence in their quota allocation process. Based on a survey done by the Alexander Group, about 60% of the companies rate their current quota allocation process as less than effective.
The sales quota is a fundamental part of any sales compensation plan design. It is used to determine commission rates, when the accelerated rate kicks in, when quarterly and annual bonuses are paid, and sales excellence team membership!
In addition, there is a game going on when quotas are being set at the beginning of the year in many companies. This is the over-allocation of quota game. A simple example (1) is the company believes the realistic revenue opportunity is $10m, they have 10 reps, each rep has an equal territory opportunity, so common sense would say the quota should be $1m for each rep. But the game is all about assigning a bigger quota, so the company assigns the CSO a $11m quota because they know that it’s hard to get this CSO to deliver, so the bigger the better, right! Now the CSO wants to make sure to hit the $11m quota, so assigns each sales person a $1.2m quota, for a total of $12m. The problem is that if a sales person is at 83% of their $1.2m goal, they would have been 100% of their realistic $1m quota.
Now, here is the point, how motivated is a rep that is at 83% of their goal, compared to a rep that is at 100% of their goal. Do you think they view quota attainment and excellence differently? If the sales compensation plan was structured correctly, anyone close to reaching their accelerated rate will work hard to close more business as every sale closed over quota is worth a lot more commission!
When you develop a sales compensation plan, the sales quota that is used during the process has a direct impact to the commission rate. Logically if quotas change, rate tied to sales dollars also need to be changed. Often a company overlooks the mid-year quota change relationship to the overall sales compensation plan design.
There has been lots in the media lately about preparing for a mid-year quota increase. What is the real motivation behind this? Why would a company mess with the quota at this point in the year? Some examples include:
We made a mistake when we set the original quota and set it too low.
We had too many bluebirds and our close rate is better than planned.
Our reps are making too much money.
Our cost of sales is too high.
Too many reps are reaching quota.
But all these are in favor of the company, reducing costs and penalizing the sales team. The last thing you want to do is demotivate a motivated sales team! For example (2), if the company had assigned each rep $1m but too many sales people are on track to far exceed that number, they might consider raising the quota to $1.2m. The math is the same as in example 1. If a rep is on track to achieve their $1m quota, and the quota gets increased to $1.2m, they are only on track to achieve 83% of their annual quota. Good bye President’s Club! How does that impact their motivation! Now you may have had a few closed bluebirds (very large unexpected) deals. As a sales manager, I fail to see the logic of assigning a larger quota to them and if the sales compensation plan was correctly documented, you would have a clause explaining the impact to quota of these large deals if it was a problem for your company.
One company I worked with was faced with revenue that exceeded their planning by double! Now that is a problem that all of us would like to have! They chose not to change the quota or the sales compensation plan mid-year, even though they understood their cost of sales was going to be way beyond plan because they had a hefty accelerator. By leaving the sales compensation plan alone, they did have cost above the plan, but the revenue ended up being more than double, it was 240% above plan. Would you be willing to pay more to increase your sales by 240%?
If you’re a sales rep, push hard for an explanation before signing a mid-year quota increase. You need to understand the justification for the quota increase and what you’ll need to change on a day to day basis to achieve this higher number. Remember you did sign a commission plan document at the start of the fiscal year that clearly stated your quota and the company needs to provide you with amended documentation that has to be signed.
Now I am curious, why would you increase your quota mid-year? If you do increase it, did you also change your sales compensation plan document to reflect the new quota? Did you change your commission rates too?