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.
Last week we covered part 1 of this 2 part series on quotas. Below is the continuation.
We covered the first 5 of the below list in part 1. Let’s jump into #6 and take things from here! And if you want an example compensation plan, I’ll have one at the end for you 😊
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
6. Meeting market standards
For the sake of your business (and also for your sales reps), you need to ensure that the ratio between someone’s OTE (on-target earnings) and quota is appropriate and in line with market standard. This ensures that your business not only grows at a healthy rate, but that you can scale. It might be ok early on to have ratios that are slightly below as you figure out the proper comp plan, but these must be in line especially as you look to expand or bring on outside funding.
The typical expectation in software sales is 1:5 which means that someone who makes $100k should carry an annual quota of $500k. Interestingly, this translates well to many other industries however you’ll want to consider other factors. For example, a car salesman should generate $500k of revenue for the business but managers might consider where that other revenue comes from - whether it’s service, aftermarket products like warranties, etc.
It’s important to consider the nature of your revenue in this calculation. Software (or something like insurance) is usually recurring revenue and with limited churn, you should retain this revenue for several years which will pay dividends over the total lifetime cost of that customer. The other example of a car salesman might mean that they should carry a higher quota given that many customers immediately churn since it’s unclear where and when they will make their next purchase.
7. Taking feedback
The reality is that all salespeople regardless of role and company will have feedback (aka complaints) about quotas. There are always reasons why people believe they can’t/won’t hit their quota. It’s your job as a leader to listen to all feedback and decide when it’s valid.
The easiest example of times when this feedback is warranted is early on in a product lifecycle. At BuildingConnected, we launched several new products as the company was more mature but because we were selling something new to a new audience, we had no barometer for the sales goals that were realistic. We set quotas based upon company goals and unfortunately they weren’t achievable. We had to listen to our reps, learn about the realities of sales cycles, and adjust accordingly.
Many of the changes that we ended up making were to future quarter quotas and as we dialed in those goals we could accurately predict how the business would perform with those product lines. This is all a balancing act of being able to have some give and pushing back in certain areas to encourage your team to sell through inevitable challenges in every sales cycle.
8. When to announce new quotas
The short answer here is as late as possible - the first day of the new quota period. You want to keep sales reps focused on hitting their quota for the current period. If you announce a big quota increase for the following quarter while you still have a month remaining in the current one, you risk sales reps sandbagging and pushing deals to the following quarter. It’s always ok to give some high level guidance for what’s coming, but keep the specifics confidential until it’s time to kick off the new quota period.
Whatever your quota period is - monthly, quarterly, etc. - you should have a kickoff with your team on that first day. That’s when you will review the prior period, what went well, what didn’t, changes you’d like to see, and most importantly what the expectation is for that new period. This is when you’ll roll out the new quota and you can answer questions or respond to any gasps in the audience when there’s an uplift.
9. Tracking & payouts
Tracking rep performance can be challenging especially if you have a complicated commission plan. Simplicity is always key for both sides. Make the incentives easy to understand so that reps can drive hard at their plans and managers have an easier time paying these out.
Many teams will simply track performance via their CRM. This can be done through reporting mechanisms but tools like QuotaPath enable automation around it. They provide a ton of clarity for reps through the month or quarter and then when it comes time to pay commissions, managers get a report with a click of a button on what exactly to pay.
Payouts should be done within 30 days following the close of a commission period. This provides clear deliverables for both sides and enables management to have enough time to get their ducks in a row to pay.
10. Pitfalls
There are tons of ways that management makes mistakes around commission plans. Here are a few:
Making commission plans overcomplicated: when plans are hard to understand, reps don’t know where to focus or how they get paid. Confusion is very bad for reps. Keep things simple and focused on the most critical north star metrics to incentivize the right behavior.
Not having decelerators: management needs to have incentives in both directions. There need to be accelerators for people who perform above 100% and decelerators when they’re below 50%. If a rep isn’t performing in a certain period, they may sand bag to push deals to the following period so they can overachieve. Having decelerators ensures that they meet a minimum threshold.
Focusing on the wrong metrics: you don’t want to have things that seem positive but could incentive the wrong behavior. For example, having a minimum call volume (very common). This might encourage reps to simply make a ton of calls even when those are not valuable.
Thanks for reading all about setting quotas! 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!
A reminder to please send me questions about anything related to this post or beyond and I will do my best to cover it. If you enjoyed or found this helpful, please share and subscribe below.