Using quotas to set sales goals is the most popular option, but quotas aren’t perfect. Every pay period, you need to re-adjust quotas, which typically requires a lot of planning. If your quotas are set incorrectly, you risk demotivating your sales force or overcompensating your reps. Finally, quotas can be hard to justify. Reps typically don’t understand how they were set, or who made the decision (CEO vs. Finance vs. Sales).
A totally different way to define sales goals is based on growth percentages. For example, if your incentive plan is quarterly, you could compare the revenue each rep was credited with their previous quarter’s revenue, so as to calculate growth. Then, you could define sales goals such as:
- <= 0% revenue growth = no rewards
- 0-2% revenue growth = 2% of revenue
- 2-4% revenue growth = 4% of revenue
- 4+% revenue growth = 8% of revenue
Other combinations are also possible, such as:
- Set goals based on % revenue growth, and pay a portion of profit
- Set goals based on % profit growth, and pay a portion of revenue
- Set goals based on % profit growth, and pay a portion of profit
Here is an example of how you can measure the same metric (here revenue) different ways:
And here is an example of how you may choose to reward your reps based on attainment:
One benefit of using % growth to set targets is that you don’t need to constantly revise or justify quotas. Your incentive program can run on auto-pilot because you aren’t using any arbitrary quota number. You are simply measuring growth from one period to the next – and so can re-use the same incentive model over and over again.
Another benefit of using % growth to set targets is that you can promote specific sales behaviors associated with high growth and expansion. Your reps will understand the importance of delivering net new revenue – vs. simply cruising or vesting revenue from existing customer accounts. Essentially, the stakes are higher.
What about the downsides, though? Consider major world economies. If a 2.1% growth is predicted, but a 2.3% growth is delivered, this is considered highly unexpected and greatly impacts the stock market. In other terms, a tiny change in delivered % growth is considered very significant. This type of sensitivity issue can make it difficult to set growth thresholds correctly.
Also, if a quarter was a bit slow, you could end up with negative growth. Does this mean you really want to pay zero commissions to your reps? Probably not. Psychologically, it feels painful to pay commissions for delivering negative growth. Yet, you probably need to include some type of compensation for what looks like poor performance. This can send the wrong message to reps.
Finally, unless your business is very mature, predicting the expected growth in revenue or profit can be very difficult. Usually, there is a high degree of variance (even from quarter to quarter, due to seasonality), so it can be challenging to design a working commission schedule based on % growth. We recommend checking past fluctuations in % growth to determine the stability of your chosen growth metric.
Using % growth to to set targets can free your incentive program from quotas. However, it is a viable approach only if:
- Your measured growth is reasonably stable (ex: mature business)
- You want to promote more aggressive sales behaviors focused on growth
- You are willing to pay some commissions when delivering negative growth
Whether you want to use quotas or percent growth, you need a sales commission management which lets you evaluate different models and easily calculate sales commissions. Visit us online to learn more about how you can automate your entire sales commission program.