Quota setting in today’smarket.Understanding the basics.

The economic conditions of the last few years have tested even the most experienced sales and human resource

professionals. Certain industries or markets have experienced anemic growth while others have seen sales climb.

When it comes to forecasting, such uncertainty and volatility in markets can make historical track records and

standard assumptions unreliable barometers of what’s to come, adding greater pressure to the task of setting

sales goals.

Traditionally, many companies have employed the path of least resistance when setting yearly sales targets—

choosing to rely on last year’s sales plus growth. The resulting targets were intended to keep analysts happy and

the market soaring with anticipation, but sales management was left to figure out how these targets could be

allocated as individual quotas for the sales teams.

In a strong market most good sales people have no problem achieving their goals. But what’s the best approach

when last year’s sales may or may not be replicated in the coming year?

Unfortunately, there is no be-all, end-all solution to this challenge of quota setting, no magic bullet. Quota setting

is part art, part science. The quota-setting process must be tailored for the company’s situation and its limitations

—what worked well in growing markets may not be effective in the current market. Perhaps the only safe choice

is to go back to the basics: gather the data necessary and available to inform quota decision-making and then

determine the best type of quota and quota-setting method given the company’s products, strategy, markets

and sales representative profiles.

Data needed to set accurate quotas.To set accurate and effective quotas, an organization must first identify how much potential is in the marketplace

and what factors are affecting sales performance. The key is to gather as much information as possible in order to

understand and make assumptions about customer need, historic production, a sales representative’s capacity to

sell and corporate expectations. Quotas are only as good as the data behind them, so the more data gathered the

better. The following questions can help organizations think about the issues that influence sales results and

inform quota-setting decisions.

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Answering the questions above will help dictate the type of quotas to use and the most effective process for setting

quotas. If certain market information is unknown and unattainable, quotas may need to be more company-centric,

relying more on historic performance or internal growth assumptions, rather than focused on customer or market

considerations. This is more of the “artful” process. Gathering most or all of the data, allows an organization to be

more “scientific,” apply better logic and reach decisions backed by facts.

Types of quotas and when to use them.The first question in the list above—how the organization defines sales performance—is a key determinant of the

type of quotas to establish. Quotas are based on the type of performance the company wants to achieve. Sales

organizations typically base quotas on volume, financials, or activities, or in some cases, they combine them. If the

focus is on units sold, they may base quotas on volume. If volume is not as important as revenue or profit, it makes

sense to set financial quotas. Activity goals work when the company lacks good information, historical precedents

or if sales representatives are new and sales managers want them to focus initially on the right behaviors or sales

process steps. To ensure effective control and motivation, quotas work best when broken down to the lowest

possible level such as salesperson, district, branch, product line.

Volume-based quotas can be highly effective when sales representatives sell just a few products and the prices of

those products fluctuate. Volume quotas are the most traditional and the most common. Sales representatives favor

them because they are simple to understand and compute. Volume quotas specify the amount of product or service

a sales representative must sell over a given period of time. Volume is typically based on units or dollars, and higher

volume of certain products is often tied to profitability or a strategic corporate goal. Sometimes that is all that

matters—units drive company value. For example, wireless companies have always incented gross activations.

Financial quotas give sales representatives the ability to control profit and expense. Companies may combine

financial and volume quotas to create an environment that values strategic thinking around margin and cost.

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Financial quotas can be difficult to set as regional factors will affect costs and profit. Additionally, certain products

or services may require a different sales process which can escalate sales expenses.

Activity quotas can help to motivate an inexperienced sales force or to reward a sales force for changing behaviors

or their selling process. They also work well when a sales cycle is very long and certain undertakings are the best

way to judge performance. Activity targets measure the individual actions, events or milestones that sales

representatives accomplish. The goal is to motivate the sales team to consistently pursue and complete the actions

that will promote sales activity. The quotas often include both selling and non-selling activities and may or may not

be tied to actual sales results. If the sales cycle is long or sales professionals are inexperienced, it can make sense to

focus on activities or milestones. The key is to clearly define the required actions or behaviors and specify both a

time period and expected frequency for them. Representatives may be required to do simple things at first (e.g.,

contact a certain number of clients) with more tasks added over time combined with volume or financial targets.

Quota setting methods.Armed with the right information and an understanding about the types of quotas that will be most effective for the

sales teams, an organization can identify its quota-setting methodology. There are five primary ways to set quotas.

Some are more complex; some are more detailed, but there is no right or wrong approach. It all comes down to

what an organization wants to accomplish and the type of information available to inform the selection process.

The most strategic approach blends a customer-centric focus with corporate expectations (the bottoms up/tops

down approach explained below); it can be very detailed and time consuming to determine. The simplest approach

—the fixed allocation method—applies an equal quota to everyone across the board, but it does not consider

market opportunity within a set of accounts. Companies often combine methods to accomplish specific goals.

Often called the “peanut butter” approach, a fixed allocation sets flat targets across the complete sales team. This is

the most company-centric method and the simplest process to employ. The major downside is that it does not

account for territory potential, which may create a free-ride for representatives with the highest potential territories,

or impossible targets for those in low-potential territories. Companies use this methodology when little data is

available and a cost-of-sale approach is in place. This methodology is used in all environments, but is more common

in transactional environments with shorter sales cycles.

Historic allocation assigns quotas based upon the prior year’s performance. A representative gets a growth target

on top of last year’s performance. As with the fixed allocation, historic allocation is a simple process and it does not

account for territory potential. In many cases, it places a performance penalty on the best performers as they carry

the burden of a growth goal on top of their historically strong performance.

Neither the fixed nor the historic allocation methods consider the potential of individual accounts. The next three

methods are more strategic in that they consider internal and external factors that influence sales performance and

the sales potential of the regions.

The adjusted value method is similar to an historic allocation, but it applies factors that modify the targets, e.g.,

market opportunity, penetration of an area, competition or representative experience. This method typically creates

more equitable objectives for representatives as it applies adjustments and is typically easy to administer. It can be

a go-to method for organizations that have access to accurate market data. The adjusted-value method can be

highly effective in a market where there is considerable uncertainty.

The account planning method assesses the potential in individual accounts. It evaluates account opportunity and

assigns the corresponding target to the representative that owns the account. The sales manager and sales

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representative typically drive the process; it is most effective for territories or regions that have a small number of

large accounts per representative. If a company has a large number of accounts, it can be hard to do account

planning.

A final method is the bottoms-up/tops down method, which considers market potential information and creates

estimates of the territory potential. Market potential is then reconciled with the corporate objectives. This method is

the most complete as it accounts for market opportunity while balancing the corporate goals. It is most commonly

used in organizations that have good data and a strong performance record. Generally, this is an effective method

to use in any market because it considers the potential of all accounts—how much can they sell—and marries

potential with corporate expectations.

Manage expectations for the quota-setting process.There are a few things common to all best-in-class quota-setting practices. First, is the need for a consistent

process. Quota setting can improve over time if a company uses a consistent approach. If the process frequently

changes, managers never have a chance to develop proficiency in allocating quotas.

Second and most important, someone must be designated as the owner of the quota-setting process. Ideally, quota

setting resides in a sales operations group. Assigning responsibility to an individual, or group for setting quotas and

managing adjustments, ensures consistency in management and accountability.

Finally, companies that set quotas well know that quotas work best when they direct behavior in one direction.

Add-on compensation components, such as MBO (management by objective) and sales contests may direct

behavior in conflicting directions. In the worst cases, salespeople can make a good living even if they miss their

quotas.

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The high cost of poor quota-setting.While not a substitute for solid sales management, quotas are proven tools for motivating field performance. The

accuracy of quotas directly correlates to the quality of the data and the time invested in getting it right. The goal is

not to predict outcomes, but rather to allocate responsibility for achieving the business plan in a fair and reasonable

way. Even marginal improvements in the accuracy of quotas can reap significant soft and real cost savings.

Take a sales force of 500. Say that for every one percent achievement before hitting the quota, a sales

representative makes $1,000. For every one percent above 100 percent of the quota, the representative makes

$4,000. Narrowing the band of achievement can lead to a cost savings of 15 percent. Even though more people are

making their quotas, fewer people are wildly exceeding their sales targets.

For more information please contact, Joseph DiMisa at 770-403-8006 or Joe.DiMisa@KornFerry.com.

About Korn FerryKorn Ferry is a global organizational consulting firm. We help companies design their organization – the structure, theroles and responsibilities, as well as how they compensate, develop and motivate their people. As importantly, we helporganizations select and hire the talent they need to execute their strategy. Our approximately 7,000 colleagues serveclients in more than 50 countries.

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