Many of us have received our quota and thought, “Where the $#@&! did this number come from?”
Today, you will learn the truth.
I’ll shed some light on how quotas get created, how they are assigned, and what you can do about it.
You may be surprised.
A Simple Model
Before diving into more detailed explanations, it might be helpful to see the basic model for setting quotas.
- Somebody (CEO, VP, Board, etc.) makes up a Sales Target (aka “the Number”).
- Divide the Number by the number of Reps.
- There’s the quota.
Here’s an example:
- CEO says the Sales Target is $15M.
- There are 5 Sales Reps.
- $15M divided by 5 = $3M Quota per Rep.
There can detailed analysis, consideration of historical performance, territory differences, Rep tenure, turnover, market conditions and much more taken into consideration when developing quotas.
I’ll cover some of these later.
But the basics are almost always the same. Someone makes up the Number and it is divvied out the reps – often equally.
How Sales Quotas Get Created in Enterprise Corporations, VC Backed Companies, and Large Private Companies
Each year, the CEO and his Executive Team will draft a financial plan for the upcoming year that specifies revenue and expense targets. In my experience, this plan always has sales increasing over the previous year.
The Executive Team presents this plan to the Board. The Board then insists that revenues should be higher and expenses need to be lower. After some negotiations, the financial plan is finalized. This plan defines the sales targets for the upcoming year. (ie. The Board has made up the Number).
The Number may only have a limited connection to reality from the Sales Manager’s perspective. There are many factors that can impact the Number that have little to do with the Sales Manager’s day-to-day activities.
- The Number could be based on what is required to raise more capital, have an IPO, spin-off a division, or sell the company.
- The Number might be influenced by what your competitors are projecting.
- It could be influenced by the sales numbers that Board members have seen at other companies – even if those companies are completely unlike your company.
- The Number might have been increased to meet Independent Analyst’s expectations (which are frequently incorrect but nonetheless can impact guidance, forecasts and stock prices).
Regardless of these influencing factors, we now have the Number.
Now it gets interesting.
The CFO takes the number and increases it a bit. Then he assigns it to…
…the VP of Sales who increases it a bit and divvies it out to…
…the Sales Directors who increase it a bit and assign it to…
….the Sales Managers who usually don’t increase it at all and assign it to the Reps
Shite flows downhill.
Each level increases the quota “just a little” to account for market shifts, employee turnover, product issues, etc.
Here’s an example:
- The Board wants $50M in sales.
- The CFO increases this 3% to $51.5M.
- The VP of Sales is given a $51.5M Quota. He then adds 3% and assigns $53M to his 2 Directors.
- The two Directors are each given a $26.5M Quota. They add 3% and assign a $27.5M Quota to their Managers.
- The Managers aren’t allowed to increase the number so they divide the $27.5 into Quotas for the individual Reps.
By the time it reaches the Reps, the Quota has grown from $50M to $55M.
How Sales Quotas Get Created in SMBs, Startups and Midsize Companies
Similar to large corporations, it starts at the top with the President and his leadership team developing the financial plan for the year and coming up with the Number.
But there are several differences compared to large corporations:
- There are fewer layers of management between the President and the Sales Reps.
- The President is often directly involved in sales so he may have a more accurate idea of what the sales team can deliver.
- The Sales Manager at small companies may participate in the financial planning and can try to lobby for more attainable Number.
- There is often limited historical data and industry comparables. This is particularly true if the business is a startup, is launching a new product or is creating a new sales team.
Once the Number is decided, quota assignment usually happens like this:
- CEO adds 0%-25% to the Number to account for any potential issues.
- The Number is divided by the number of Sales Reps.
Believe it or not, it is often that simple.
How Inside Sales Dude Sets Quota
When launching a new sales team or revamping an existing team, I am often involved in setting quotas.
First, I’ll consider the following:
- How seasoned is the sales team? Do we have the Right Sales Reps?
- Are there solid sales processes in place?
- What’s the state of the pipeline, forecast and metrics?
- Are there any new releases, product launches, or services that will impact sales this year?
- How much has the best Rep sold? The worst Rep? The average Rep?
- How are Sales trending for the past 3 months? 6 months? 12 months?
- How does this all compare to what have I seen in other companies with similar teams, products, rep tenure, etc?
Second, I’ll make my best guess for what the sales team can sell.
Third, I’ll discuss it with the President, the Sales Manager and any other decision makers. Sometimes, the President will insist on a higher Number. Other times, we may reduce the Number to account for negative factors like poor market conditions, competition or expected staffing issues. We will round the Number up to the nearest figure that makes logical sense. (eg. $10.8M is rounded up to $11M, $475K is rounded up to $500K).
FInally, we will assign the Number to the Sales Manager and the Reps. Most of the time, the quota is divided equally among the number of Reps.
This does not need to be a long, complicated process.
Ways I’ve Seen Quotas Assigned to Individual Reps
Here are some different ways I’ve seen this happen:
Using analytics, historicals and opportunity data. A good Sales Manager will look at the historical sales performance of the territory, the current pipeline, client base, committed revenues, time in territory, the Rep’s capabilities, etc. Then he will assign quotas across the team in the way he thinks will best enable the team to hit the Number. He is also trying to keep his top performers producing, allow his new reps time to ramp up, and maximize revenues for the company.
Assigning it equally across the team. If the team is new, the territory is new, the product is new, or you have no historical data, quotas will usually be divvied out equally to the reps. This is a reasonable approach that is often used until a sales team generates sufficient sales and compelling data to support different quotas based on territory performance.
Playing favorites. If you have a bad Sales Manager he will not consider any of the above analyses. He’ll assign lower quotas to his favorite reps and higher ones to those he doesn’t like. If you suspect you are in this situation, I recommend you either suck it up or find a new job.
As instructed from above. In many companies, the sales managers have zero input on quota creation or assignment. Quotas are assigned from above and distributed directly to the reps from an executive, the finance department or a compensation team. This has been my experience in working with large companies.
What to Do if You Don’t Like Your Quota
I’ve been paid against a monthly or quarterly sales quota for nearly 20 years. At times, when I was assigned quota I thought things like:
How can I be expected to sell as much in North Dakota as the rep who covers New York?
Are you trying purposely to screw me over?
Are you kidding me? I can’t sell twice as much in Q4 as I did in Q2!
Only once was I assigned a quota where I thought,
“This is a layup — I am going to crush this!” That quarter I missed my quota. How ironic.
Here’s my advice when receiving a quota you don’t like – Suck it up and focus on what you can control.
As Sales Managers, we are paid to deliver the Number.
I’ve found if I prospect aggressively, build solid pipeline, work my opportunities methodically, focus on helping customers, and use my best judgement, that good results tend to happen more often than not.
So take a few deep breaths, take a walk, complain to your spouse or a few minutes, and then get to work.
Some DOs and DON’Ts When Assigning Quota
- Don’t increase quota in the middle of a month, quarter or year because a rep is overachieving.
- Limit how often you change quotas. The less the better. Once a year is reasonable. Quarterly can be ok if you have a fast paced, evolving business. More than that will create anxiety for your reps.
- Don’t expect a new hire to attain 100% quota unless you are giving him a real pipeline of deals that will help him get there.
- Try to be fair. Use your best judgement.
One final tip which I was given from my mentor, Ryan Thomas. I was telling him about the previous quarter. After I handed out quotas, each one of my 10 reps came to me to complain about the quota, ask how it was created, and negotiate for a lower quota. It was a grueling 4 hours for me since I didn’t create the quotas, nor could I change them.
Ryan said, “Oh Steve, never do that again. Hand out quotas at the end of the day and then walk out the door. You never want to sit around so Reps can come complain to you. They’ll all be OK in the morning once they had time to digest it.”
So that time, I handed out quotas at 4PM and left for the day.
As usual, he was right.
What Should You Do Now?
Before making any changes, ask yourself this question:
“Am I getting the sales results I want?”
If you are, then don’t change anything. If you are not, then consider using my recommendations to roll out your next quota.
This is the Final Post of a 3 Part Series on “Creating a Sales Team for a Startup”.
Shoot me an email or put a note in the comments if you’d like to provide your insight on any of these topics.
Are you having recruiting, hiring or turnover problems with your sales reps?
Are you building a new team and want to get it right from the start?
Contact me here to learn more about how Inside Sales Dude can help.