At Sales Cookie, we help our customers automate their sales incentive programs. Some of those organizations use quotas – some don’t. More importantly, the meaning of “quota” varies from organization to organization. Let’s get started!
What Do You Mean By Quota?
Do you want to use quotas to:
- Define minimum acceptable sales performance?
- With no payout under quota?
- With punitive payouts under quota?
- With a payout trigger once quota has been met?
- Define standard, on-target sales goals?
- Pro-rate revenue to calculate commissions?
Quotas As An Expected Minimum
Some organizations use quotas to specify the minimum acceptable sales performance they expect from their sales force. For example, an incentive plan could pay nothing while under quota. Or it could pay a punitive 2% of revenue while under quota.
Sometimes, only revenue or profit above quota is eligible for commissions. In other cases, the quota behaves as a retroactive trigger. Once the quota is met, all accrued revenue (including revenue under quota) becomes eligible for a payout.
Organizations which use quotas to specify minimum acceptable performance often refer to “quota retirement” to indicate that a rep has met quota – and so can start earning more substantial sales commissions.
Quotas As An On-Target Goal
Other organizations use quotas NOT as minimums, but to specify reasonable, yet challenging goals – essentially a norm. In this case, quotas simply define expected sales performance. Assuming this standard level of sales performance is delivered, reps should expect a corresponding amount called the on-target commission.
For example, you could define a monthly quota of $100K, which, if attained, will deliver a standard, on-target $5K incentive. However, because your quota now represents a standard (not the minimum acceptable), some reps could fail to reach quota.
For this reason, many organizations include other attainment levels, such as 50% and 75% of quota. Those attainment levels usually have different payout levels. Only reaching 100% of quota delivers the on-target expected variable incentive associated with “meeting goals”. Of course, you can still have higher level of attainment with juicier payouts!
Quotas As A Way To Pro-Rate Actuals
Some organizations don’t expect their reps to attain any specific quota. Instead, they use quotas as a “reference number” used to calculate commissions in a pro-rated manner. Those organizations typically do not use attainment levels in their plan’s definition.
For example, you could define a monthly quota of $100K, and an on-target commission of $5K. To calculate commissions, simply divide actuals by quotas, and multiply the result by the on-target commission.
For example, if a rep attains $50K during a month, they will receive 50 / 100 * 5 = $2.5K. If a rep attains $200K during a month, they will receive 200 / 100 * 5 = $10K. As you can see there are no attainment levels. The quota is just a number used to pro-rate actuals and calculate commissions. You can still introduce accelerators for higher levels of attainment.
Defining a Quota Period
Let’s talk about quota periods. Here are some options (we’re assuming a monthly schedule, but this would apply to quarterly quotas as well):
- Quotas which are set real-time
- Quotas which are set ahead of time
- Cumulative YTD quotas
Quotas Set Real-Time
In this model, you define quotas as you go. For example, you might start working on February quotas mid-January after observing new trends. This keeps your incentive program agile. However, there is recurring administrative and planning work. And, every period, you also have to communicate and justify quotas to your sales force.
Quotas Set Ahead Of Time
In this model, you pre-define quotas ahead of time. For example, each year, you would define quotas for January, February, March, etc. Some organizations define a yearly quota, which is then divided by 12. More sophisticated sales organizations adjust quotas based on known seasonal variations (ex: February is shorter, December is slower, etc.).
Cumulative YTD quotas (With Deductions)
In this model, you are no longer working with individual monthly quotas. Instead, you define cumulative quotas, from the beginning of the year. For example, a March quota could represent expected revenue from Jan 1st to March 31st. You then calculate March commissions based on the cumulative (Jan through March) amount, and then deduct commissions already paid in Jan and Feb (otherwise you’d be double-paying commissions for the same deals). One benefit of this model is that it automatically handles refunds or cancellations.
You’ve clearly defined how you intend to use quotas. Now comes the hardest part – setting quota values correctly. Different choices are available:
- Fixed vs. percentage quotas
- Per plan vs. role vs. individual quotas
Fixed Vs. Percentage Quotas
Using fixed quotas, thresholds are defined using absolute values. For example, you could define an incentive plan with the following levels of attainment:
- $0 – $100K – 5% of revenue
- $100K – $150K – 8% of revenue
- $150K+ – 10% of revenue plus a cash bonus
Your implied quota in this case is $100K. Attainment thresholds are fixed values.
Using percentage quotas, thresholds are defined as percentages of a quota value. For example, you could define an incentive plan with the following levels of attainment:
- 0 – 100% – 5% of revenue
- 100 – 150% – 8% of revenue
- 200%+ – 10% of revenue plus a cash bonus
And you would then define a quota of $100K. This quota would typically vary depending on the individual or territory.
Per Plan Vs. Role Vs. Individual Quotas
Most incentive plans either define quotas at the plan level, or at the individual level. A few incentive plans define quotas at the role level (ex: all AEs share the same quota).
If your quotas are per-plan, using fixed quota thresholds make sense. Otherwise, if you want to use the same plan across individuals or territories, a percentage-based approach is a must. This approach lets you re-use the same incentive plan, but pull dynamic different quota values (which depend on the individual).
If you want to use individual quotas, be prepared for some data entry! As shown below, you may need to enter up many values per rep. Make sure to use a tool which makes this process easy. Your tool should also be able to specify the applicable time range for each quota value you entered.
Setting Appropriate Quota Values
Calculating commissions is a science, but designing commission plans is an art! Indeed, the reason why you have a sales incentive program is to motivate your sales force. Setting quotas correctly therefore requires an understanding of sales psychology, plus the ability to meet budgetary constraints, a knowledge of financial forecasting, and even some creativity.
We generally recommend the following:
- Avoid aggressive under-quota punishment
- Some of your reps could give up mid-period when they could have contributed some effort.
- Create various plans and run simulations
- Use a commission management solution capable of doing this.
- Ensure reasonable attainment
- 15% of reps should fail to reach quota
- 70% of reps should reach quota
- 15% of reps should exceed quota
Do you need to use quotas for your incentive program? The answer is – not necessarily. Many successful commission plans have no quota. Those plans could:
- Pay commissions based on profit – no need for quotas!
- Define attainment thresholds & associated payouts without a “primary” quota
- Define business goals which, when attained, trigger bonuses
If you don’t feel like having a “very significant number” for your incentive plan, don’t use quotas. Nobody will blame you for, it and declaring your commission program as quota free may even improve your sales culture.
Ultimately, it’s up to you to decide whether to use quotas or not, and which meaning you want to attach to them. Regardless, your sales force wants to understand how their commissions will be calculated, and how your quotas will be used. Visit us online to learn how you can automate your sales incentive program!