Sales compensation plan design is done assuming sales organization’s ability to set company wide goals, and more importantly set quotas at the territory and individual rep level. Ability to do so is important as it reflects their understanding of the market situation. Without a reliable quota setting process and territory-level understanding of sales potential, one can neither plan the resources, nor properly motivate the sales team.
So, what are most common quota setting methodologies? Unfortunately, there are many, and that makes the job much harder. Below, we describe some of the common methodologies.
1. Top-Down Allocation:
Under this method, the sales management and the executives set the corporate goal for the year based on their analysis of market situation and their internal business plans. This top-level goal is then distributed downward amongst various Regions, Countries, Divisions and all the way down to the individual territory or salesperson.
This methodology works best for long standing stable markets and products, with no significant market disruption or new product launches expected in the year. Though, not very scientific, this approach is often embraced for its simplicity.
2. Bottoms-Up Allocation:
Also, known as ‘grassroot’ approach, in this method, every individual salesperson estimates the sales potential of his/her territory. Next level manager reviews the estimates from everyone in the team and submits the aggregated estimate upwards. The process continues all the way to the top such that the goal of the company is an aggregation of individual estimates, with minor top level adjustments of course.
This methodology works best when individual territories have vastly different potential or if the sales are heavily dependent upon the capabilities and relationships of the individual salesperson in the territory. This method ensures full accountability from the salesperson. It works best when sales management has trusted relationships with individual reps.
3. Hybrid of Top Down and Bottoms Up:
This is one of the most common approaches. Top leadership provides the company wide goals, while every individual salesperson also comes up with his/her own estimate for the territory. Mid-level managers and executives in Sales and FP&A puts the two together and run a bunch of analysis. They aim to adjust the quota for individual territories, such that the aggregated number comes as close as possible to the company’s goal. This is a balancing act, and if not done intelligently, may alienate the salesperson.
This approach is best suited for market situations that are still evolving, especially if the company is launching new products and services.
This approach requires sophisticated modelling and planning tools, that allows multiple team members to collaborate on analysis and planning. Middle management has to play an important role ensuring that both, the top management and individual salesperson, understand each other’s challenges.
4. Prior-Year Uplift:
Simple to adopt and understand. Take last year’s quota and apply a certain percentage increase to everyone. The FP&A and sales leaders work together to determine what that percentage should be, but whatever it may be, everyone gets impacted equally.
This approach is suited only if both, the industry and the company, are somewhat static. If there is new competition entering the market, or the company is tweaking its products or services, this approach may not work.
Besides above four, there are several other methodologies to set the quotas, such as – survey of buyer’s intentions, industry forecasts and estimating the percentage of total addressable market (TAM). New territories require more analysis and modelling, for lack of historical data.
Choosing the right quota methodology is very important and one should pick the approach that is best suited for the company.