To be fair, this is a topic worthy of a book rather than a blog post, but we’ll cover a few of the key concepts below.
What is a quota?
A quota, for the purposes of this post, is a sales goal. It can be stated in terms of revenue or margin value (e.g., dollars), units sold, or any other measure of sales productivity. Ideally, the quota is the level of performance expected of the reasonably productive contributor; the person who achieves quota is not a “star” and not a problem – doing just fine.
In some businesses, the word used may be “goal” or “target,” but the concepts are the same.
Where do quotas come from?
Ideally, the quota setting process starts with the company’s annual operating plan (AOP). This sometimes start with the development of a forecast of the coming year from the sales team’s perspective, and sometimes it starts with market information. Often it starts with the needs of the business in order to meet profitability and growth targets set by the board, the owners, and/or senior management.
How are quotas allocated?
Once a sales leader has been assigned the quota for their team of individual contributors, there are a few basic methods they could use to allocate that quota to individuals:
- Increase vs. historical sales. In this method, a “clean” baseline is established by taking out unusual (non-run-rate) deals or accounts from the prior year results, adding in known/expected sales. Then each person may be assigned the same value in increase (dollar, euros, units), or the same percent increase over the prior year.
- Account planning. For businesses with a relatively small number of large accounts, the quota is allocated more to accounts and opportunities than to individuals. The individual quota is then the sum of the quotas of the accounts to which they are assigned. Each account quota is assigned based on the particular expectations and opportunities in that account.
- Market based. In some businesses there is good market data about expected changes in opportunity by geographic area, customer type, degree of penetration, or other method of segmentation. In this case, the quota (or quota increase vs. history) may be higher for certain market types and lower for others.
Most businesses blend a combination of these approaches to determine quotas.
In addition to these considerations, it should be noted that some sales managers also consider the earnings requirements of the people on their team and try to balance quotas so that they have the best chance of retaining key contributors. This may mean making the quotas for key contributors somewhat less challenging than those for other sales people. This practice is very common, though rarely openly acknowledged.
How much quota to allocate
100% of the quota allocated: A fully allocated quota indicates that the sum of all individual contributor quotas is equal to the sales expectation in the annual operating plan. Many companies require that the quota be fully allocated in order to ensure alignment of the sales plans with the annual operating plan. However, in many businesses the quota is over-allocated.
>100% of the quota allocated: This means that the sum of the individual quotas is greater than the sales expectation in the annual operating plan. This is a reasonable practice in order to ensure that the quota is, in fact, fully allocated given the likelihood that there will be vacant positions and people new to the role in the organization at any one time. An over-allocation of about 5% of the annual operating plan is generally a healthy practice. However, if over-allocation goes much beyond 10%, businesses may experience an uncomfortable situation in which the overall results are reported as on-target while the individual sales people are generally not earning their at-target pay. Quotas are sometimes materially over-allocated as a sort of “insurance, just to be sure we make our number.” This is rarely an effective practice. When quotas are seen as unattainable by the sales people, the motivational traction that the compensation plan should be providing is undermined and results may suffer.
<100% of the quota allocated: This generally happens when a business unit accepts a sales target that is greater than what they believe will be achieved by the sales team, and the management chooses to leave some portion of the quota unallocated, and hope for a “bluebird” (unexpected, substantial sale) to make up the difference. This is not an ideal choice, but may actually result in better overall performance of the sales team than could have been realized if the quotas were seen as unattainable by most.