Many organizations would prefer to manage the sales force without quotas. They are hard to set, always subject to challenge, and frequently get trumped by forces beyond the control of the sales force. And some sales organizations do operate without quotas: Classic "income producer"-type sellers—such as manufacturers reps, real estate agents, and tradersȔmay have "target performance" levels to achieve.
Since they earn commission payments, however, the pay system pretty much creates a self-evident performance outcome. Simply stated, if you don't sell anything, you don't get paid. There is little room for confusion for this sales model. While the assigned target performance objectives are interesting, the commission payments are the final arbitrator of good or poor performance.
But most business-to-business sellers are "sales representatives." Their role is to represent a company's unique product and service offerings. Sales management hires and trains a well-aligned sales force to promote these products and services to accounts. Sales leaders offer a competitive base salary and incentive opportunity—with upside earning potential—to recruit and retain sales personnel. There is usually an explicit commitment to sales talent: "Achieve the goals we set for you and you can earn your target incentive, plus more for outstanding results."
Most companies plan for 60 to 70 percent of all sales personnel to reach and exceed their goal, thus earning target earnings and higher. This sales management model requires assigned sales quotas to work. Since the target earnings are pre-specified, sales management must define annual objectives to achieve payouts. Thus, sales quotas provide the means for assigning objectives to achieve payouts.
The assignment of a sales quota begins high in the headwaters of the finance and marketing teams as they prepare the annual forecast for the next fiscal year. Hopefully, sales management is providing input, too. Usually prepared three to six months before the start of the fiscal year, the forecast is subject to many competing demands. Publicly traded companies try to balance the need to exceed industry standards while ensuring the accuracy of the financial forecast.
Once established, senior management passes the forecast to the sales department as an "annual sales objective." Through the process of quota allocation, sales management—using a variety of techniques—then disperses this number to the regions, districts, sales teams, and then the sales representatives. Anything can happen along the way…and usually does.
Sometimes the forecast is wrong: It's too easy or too hard. Sometimes sales management will add to the annual sales objective (over-assign) or under-assign it (known as "breakage"). Of course, as sales management filters the sales objective down to the salesperson, field management is making numerous good—and some not-so-good—decisions.
During normal economic times, this imperfect system creates a set of sales quotas for sales personnel. Whether driven by advanced algorithms or gut judgments, this system creates predictable noise inherent in all sales quota systems.
But the uncertainly of 2009 creates a compounding problem for sales executives. Are the quotas too hard? Are they too easy? How will the second half of the year look? Should I make adjustments now? Should I wait?
If you have income producers, let the Darwin model prevail. The strong will survive; the others will find something else to do with their lives.
If you have sales representatives, here are some potential solutions. If the first quarter wasn't too bad, then…stay the course. If you have at least 45 percent of your salespeople reaching quota, while not great, it's not a disaster. Don’t make any adjustments. If your quotas were widely wrong for the first quarter, with more than 45 percent of your sales personnel not making quota, you need to make some changes. Here are your choices:
Add an accelerator. Don't change the quota, but provide additional dollars for exceptional performance. The people exceeding quota will retain their historic earnings levels.
Declare a sales quota holiday. Pocket the first quarter results and pay out 80 percent of the target incentive to everyone.
Terminate the current quotas. Provide no make-up for Q1, but redo the quotas for the remainder of the year.
Shorten the sales quota cycle. Move to quarterly quota allocation to improve accuracy caused by uncertain market trends.
One final note: If finance complains about the increase in relative costs, you will need to trim costs by other means, such as reducing other sales expenses and headcount.
David J. Cichelli is senior vice president of The Alexander Group in Scottsdale, Ariz. He can be reached at firstname.lastname@example.org.