Does your sales incentive program use quotas to set goals? In this blog post, we discuss scenarios where using quotas make sense. However, we also try to make a case for NOT using quotas.
Why Use Quotas?
Here at Sales Cookie we help hundreds of SMBs automate their sales commission program. Most use quotas. However, many others deliver successful incentive programs without resorting to quotas. Below is our observed distribution of quota-based vs. quota-free incentive programs so far.
It seems the #1 reason why organizations use quotas is simply because that’s what they are used to – not because it makes sense. To be fair, the #2 reason for using quotas is to that they help management formulate clear, simple goals. A quota is a strong statement that:
- Everyone is expected to meet a certain (reasonable) target
- If you don’t, rewards will be meager (and you might lose your job)
- If you do, rewards will be significant
In other terms, quotas set expectations. The under-quota zone protects organizations from spending too much on poor performance. More importantly, quotas serve as a rallying point, motivating reps to exceed an easy-to-understand threshold.
In some environments, quotas are seen as something to beat. In other scenarios, quotas are seen as something to get rid of (ex: “quota retirement”). Either way, quotas can, and often do, generate strong sales motivation.
Why Not Use Quotas?
Unfortunately, there also are several reasons for not using quotas:
- They are too binary
- They require constant adjustments
- They are hard to justify
- They can kill sales motivation
Quotas simplify goal-setting. However, they also create binary scenarios which aggressively punish under-quota performance. They can cause serious disruption and drama if miscalculated. They can make reps feel they don’t have a stake in every sale because their #1 priority becomes to reach a minimum number in aggregate. Due to the binary nature of quotas, sales reps who feel they might not reach their assigned number may give up, negatively affecting sales performance. If you think about it, a quota-based plan is nothing more than a simplification of a more sophisticated tiered incentive plan with multiple level of attainments. Does it really make sense to use just 1 tier for a sales commission program (versus one with say 4 levels of attainment)? Which option do you think is more robust and less likely to cause a meltdown if thresholds were set incorrectly?
Constant Adjustments Required
To set quotas, one must take into account roles, territories, and product lines. But also financial projections, industry trends, and seasonal variations. For large companies, this is not a problem because they can afford to hire a team of (expensive) sales compensation analysts. Those analysts are responsible for detailed planning and forecasting. They will help set quotas which (fingers crossed!) will avoid another quota Armageddon. However, hiring those employees represents a considerable expense, and does not provide immunity from disruption – ex: a competitor going out of business, changes to pricing models, the launch of a new product line, adverse events impacting a company’s reputation, etc. In short, setting quotas is expensive, somehow unreliable, and remains fragile – even when using dedicated expert resources.
Hard To Justify
With a quota-based incentive plan, it becomes necessary to justify one more parameter – thresholds. Unfortunately, quota thresholds can easily be perceived as arbitrary, unreasonable, or even “crazy”. Most sales reps will not accept quotas without some understanding (and acceptance of) the process used to set them. Unfortunately, the quota decision-making process is often messy because it relies on a mix of financial projections, spend control constraints, and various negotiations. For this reason, many organizations choose NOT to justify quotas, which can lead to resentment. Also, because different plans will have different quotas, some reps may feel cheated or treated unfairly. Finally, in order to set quotas, sales and finance must cooperate. Quotas have a tendency to cause heated discussions between finance and sales. This can negatively impact relationships between departments.
As mentioned previously, incorrect quotas can cause sales reps to give up. They also make reps feel like they don’t have a stake in every sale (because reaching a value in aggregate is required to receive any meaningful compensation). The perceived arbitrary nature of quotas can further sap employee morale. Adjustments to quotas, sometimes required in response to external events, can damage sales motivation. To reduce risk, some organizations artificially lower quotas. While this help avoid drama, sales motivation is also often reduced because goals start to feel a bit too easy. In conclusion, the binary nature of quotas increases the overall sales motivation risk profile.
What’s The Alternative?
In this blog post, we discussed pros and cons of quota-based plans. We hope we were able to convince you that quota-based plans might not always be the right solution. In an upcoming post, we’ll describe some quota-free incentive plans which:
- Are still easy to understand
- Reduce the sales motivation risk profile
- Ensure reps have a stake in every sale
- Promote not just revenue but also profitability
- Include accelerators at higher levels of performance
In the meantime, visit our website to learn how automation can make your sales commission program more agile.