Hey 👋 I’m Nate! Every week I write about the strategies for building a sales engine at companies both big & small. My goal is to provide leaders with actionable insights rooted in examples so that you can apply them to your own company. Please send me questions on the topic and I’ll do my best to provide direct advice and/or cover in an upcoming newsletter.
Setting quotas is one of the hardest and most important things that management has to do for its sales reps. Whether you’re thinking about making your first sales hire or have a seasoned team, quotas - and everything that’s in the quota plan - are what drive the incentives for your team. Incentives always drive actions, so it’s highly critical to get this piece right. And if you want an example compensation plan, I’ll have one at the end for you 😊
Here’s what we’re going to cover:
Understanding how to drive action
Starting with business goals to set quotas
Being realistic, being dynamic
Proper quota cadences (monthly, quarterly, annually, etc.)
Ramp quotas
Meeting market standards
Taking feedback
When to announce new quotas
Tracking & payouts
Pitfalls (focusing on wrong thing, over complication)
This week we’ll cover #1-5 and next week we’ll cover #6-10. Let’s dive in!
1. Understanding how to drive action
It may seem obvious, but the goals you put into your compensation plan (aka quotas) are going to drive every single action that your sales reps take on a daily basis. Want people to make more calls? Set a quota and tie compensation to it. Want to get more demos? Set a quota and tie compensation to it. Want to have more opportunities? Set a quota and tie compensation to it.
This power of being able to drive action because employee’s income is tied to it comes with a ton of responsibility. You need to have clear, uncomplicated goals of the activity that your reps should be working towards. It’s your responsibility to set these goals to be in line with revenue targets. They must be fair, attainable, enticing, motivating - and you need to be willing to change them as your business (and market conditions) change.
2. Starting with business goals to set quotas
Quota setting is typically a pretty simple math equation. If you want to sell $1M of products in a quarter and you have 4 sales reps, they each need to close $250k. The reality is that things don’t work out like perfect math equations and in a growing business, situations change quickly.
The first and most important step for quota setting is understanding your business goals. In our example, if you want to sell $1M of products in a quarter, you need to understand the reality of being able to attain that. Here are some questions to ask yourself:
What did you achieve the last 2-3 quarters? If you’re running a mature, predictable business this could be easy to answer (and predict for future quarters). But for many, you’re looking to grow QoQ. If this $1M is a stretch goal, understand how much of a lift it’s going to take from your team. Can the existing reps simply increase productivity or do you need to hire more people, roll out new product offerings, increase pricing?
How was your rep attainment the last 2-3 quarters? Depending on performance, you can gather the average and back into an expected result. For example, if the average is 80% then to get to $1M in sales you actually need a $1.25M quota for the team.
There are several other factors that go into quota setting that we’ll cover later, but the most important step is having a clear view on where you need to end up from a business performance perspective to know where to set individual goals.
3. Being realistic, being dynamic
Once you’ve crystallized the goal your business is working towards, you need to be realistic about your team’s performance to achieve those goals. My stance is to always be conservative - plan for the worst and hope for the best. That means that if you see your team averaging 80% to quota, then it’s probably helpful to add a little buffer in case a few deals slip or go sideways.
It’s important to be realistic about the ask from your team. You might have a business goal of $1M in sales for the quarter, but if last quarter was $500k and you haven’t added any headcount, you might be in for a rude awakening. Be realistic about rep performance (read: efficiency) and how big of a leap people have to make in their efforts QoQ.
You also need to be dynamic. Early at BuildingConnected, we launched a new product called Bid Board. We had high aspirations for our sales, but because it was a new product we had no prior data to understand how much we might be able to sell. The product was also not feature-rich enough to sell to some customers. Both of these factors combined meant that we were on track for a terrible performance against the quota we were given from the business goal. So what do you do? We adjusted quotas down mid-quarter. This did two things: (1) it showed employees that management could admit when it made a mistake, then made it right on payday (2) instilled confidence in the team that we would support them. Fast forward a year later when the business was booming and we hadn’t lost a single rep from that team.
4. Proper quota cadences (monthly, quarterly, annually, etc.)
Quota cadences are all about sales cycle length. Reps need time to build a pipeline and close. The cheat code in all these cases is a ramp quota. This is effectively a draw (where you pay your reps full or partial commission for a period of time after starting) to enable people to earn while they get up to speed on your product and get ready to close.
If you’re selling a high velocity, less sophisticated product (think Yelp) then you might want to be on a monthly quota. This is likely because your product could be sold to a prospect same-day, but on the average is a roughly 1-2 month sales cycle. Having a shorter cycle pushes your reps and creates urgency with prospects to enable more deals to close more quickly. At BuildingConnected, we moved our Bid Board team from a quarterly to monthly quota and saw rep performance increase by 30-40% simply because there was more urgency around the deals.
Selling more enterprise deals where you have a 3-12 month sales cycle will mean that you’re most likely on a quarterly quota. In some rare exceptions for extremely long sale, high priced products you might see a semi-annual or annual quota. In both cases with longer cycles, you will see management provide longer ramp times to enable reps to build momentum and predictability for their pipeline. When you get into longer cycles, it’s not uncommon to have both quarterly and longer term goals. There are some balancing acts that you can manage to encourage reps to be closing business at a quarterly level, but understanding that things can slip, you can still provide meaningful payouts so long as the rep (and in turn the business) hit the key annual targets.
5. Ramp quotas
Every time a new hire starts their role, they need critical time to learn, train, and become efficient. Depending on the length of the sales cycle, that ramp needs to be proportionally set in fairness to both the rep and the company. The rep needs to be in an environment where they’re encouraged to learn so that they can provide the highest output possible. If you force people to get into sales mode too early, it can backfire dramatically…an untrained rep will fall on their face - they won’t perform, will make your company look bad, and will suck up time from management. Over index on getting the ramp time right so that people preform well and are retained longer.
In general, the ramp should be roughly as long as the average sales cycle. The case where this isn’t true are on the edges - meaning if there’s a cycle that is very short or very long. The minimum ramp time is usually 6-8 weeks even for something that is transactional and unsophisticated. The other end of the spectrum would be a super enterprise product where the cycle is over a year. You will still have goals and expectations for that rep through the year as they build pipeline to track to their eventual quota.
Taking a more typical example of a product that has a 3 month sales cycle, you should expect the ramp to be roughly a month or two longer to the point where the rep can carry a full quota. The hope would be that they close their first deal in month 2 or 3 and by month 4 or 5 they are carrying full quota.
All of these things are trial & error. The point is to make people successful and retain them. If your policies are too aggressive or too conservative, adjust them for the subsequent hires.
Stay tuned for next week where I’ll cover the second half of these topics. If you want access to a free template of a full quota compensation plan, drop me a line below and I’ll send it directly to you!
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