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Have Quotas Overstayed Their Welcome?

Have Quotas Overstayed Their Welcome?. May 10, 2013 Hosted by Cargill. Prepared by Consulting Performance, Reward & Talent | Sales Force Effectiveness Presentation to the Twin Cities Compensation Network Sales Compensation Subgroup. Agenda for Today’s Discussion .

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Have Quotas Overstayed Their Welcome?

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  1. Have Quotas Overstayed Their Welcome? May 10, 2013 Hosted by Cargill Prepared by ConsultingPerformance, Reward & Talent | Sales Force Effectiveness Presentation to the Twin Cities Compensation Network Sales Compensation Subgroup

  2. Agenda for Today’s Discussion Quotas are the hidden half of sales compensation plans that drive performance and expense…they can undermine even the most effective plan. Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012

  3. Aon Hewitt Associate Partner and Manager, based in Lincolnshire, IL ~17 years sales compensation and effectiveness experience Insurance/financial services, consumer products, health care, manufacturing Aon Hewitt Partner, based in Lincolnshire, IL >25 years sales effectiveness experience Medical products/pharma, CPG, financial service, general manufacturing About Us Rob Steve Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012

  4. Introductions • Name • Company • Current role • What is the primary sales effectiveness issue currently affecting you and/or your sales organization? • What are you looking to get out of this session today? Consulting | Global Compensation & TalentProprietary & Confidential | AA/SF/GCSOF.PPT/LS-11581 02/2012

  5. Opening Discussion • Why do companies use quotas for their sales forces? • What issues at your company related to quota setting attract you to today’s roundtable? Consulting | Global Compensation & TalentProprietary & Confidential | AA/SF/GCSOF.PPT/LS-11581 02/2012

  6. Quota Setting Approaches and Best Practices Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012 5

  7. Companies Commonly See One or More of the Following as Potential Indicators of a Quota Setting Problem…

  8. …as well as other commonly realized issues • Sandbagging by reps (and management) • Over-burdening top performers with higher quotas • Talent churn in territories with low potential • Loss of aggressiveness in territories with high potential • Demotivation and loss of selling time due to quota negotiation and angst • Negotiation of quotas favors more senior reps • Loss of management focus and coaching time • Failure to communicate quotas in a timely fashion • Failure to communicate quota setting methodology or ownership of quotas • Meaningless quotas with no impact on pay, promotion, or recognition • Mid-year changes create perception of gaming • Can bias other incentive opportunities (recognition, award trip, spiff, etc.) A distraction at best, and a meaningful barrier to performance at worst!

  9. Quota Setting in a Sales Performance Context Companies are correct in questioning the validity of their quota setting, due to the critical role quotas play in motivating the sales force to reach business goals Aon Hewitt Sales Performance Model Align the Sales Force Understand Business Drivers Realize Business Impact • Selling and Service Model • Job Roles and Structure • Deployment Planning • Enablement Through Support Infrastructure Organization Design Creating a sales structure that is effective in meeting customer needs in an efficient manner… Customer Insight and Segmentation Business Strengths • Assessments • Recruiting and Selection • Career Paths • Training and Development • Leadership and Management Process Talent Management Ensuring the availability of the right talent for the right role at the right time… Value Proposition Maximizing the productivity of an engaged sales force to exceed business goals… • Performance Management • Quotas and Measurement • Compensation and Recognition Performance and Rewards Competitive Dynamics Problems with quota setting and allocation can undermine the effectiveness of other sales management programs… leading to slow growth and poor profitability

  10. Factors That Need to Be Reflected in the Quota 2013 = End of Year Revenue + Price Increases - + + Cross-Selling Customer Scale-Back Up-selling New Prods Expansion 2012 - + Beginning of Year Revenue Customer Churn Customer Acquisition Retention New Sales Base Business Net Growth To maximize effectiveness, sales processes, roles, management processes and key enablers should be properly aligned and connected with these elements of growth. 9 Performance, Reward, & Talent | Sales Force EffectivenessProprietary & Confidential | Motorola – Sales Compensation Workshop 041713

  11. Sales incentive plans work with quotas to reinforce strategy and drive growth Effective sales compensation plans translate the key business objectives and sales strategy into a design that drives behavior to execute. In creating this alignment, there are 10 critical elements: 1. Business Objectives, Sales Strategy, & Roles 2.Eligibility 5. Upside Opportunity 8.Quotas/Crediting 6.Measures/Weights 9.Payout Timing 3.Target Pay Levels 4.Pay Mix 7.Mechanics 10.Administration Competitive Aligned Effective

  12. Quotas tend to emerge as a tool to manage productivity and cost as companies mature IV Maturity III Optimization II High Growth I Start-up Characteristics: Commissions High Risk Simple Territories Solo Credit Characteristics: Commissions Moderate Risk Split Territories Split Credit Characteristics: Quota/Bonus Moderate Risk Accounts/Territories Multiple Credit Characteristics: Quota/Bonus Lower Risk Accounts/Segments Team Credit $0 - 100 Million 30 to 50% CAGR $5B+ -10 to 10% CAGR $1B - $5B 10 to 20% CAGR $100M - $1B 20 to 40% CAGR

  13. … which lead to 4 “Golden Rules” that guide our perspective There are 4 undeniable truths about quota setting… • The business needs them to be high, and sales reps want them to be low • Because quotas almost always affect compensation, there will be politics and complaining • There will be a distribution of actual performance around quotas – you will not have (and don’t want to have) all reps right at 100% of quota – so there will be “winners” and “losers” • Good quota setting doesn’t happen on the back of a napkin

  14. Spectrum of goal setting sophistication … Well defined/disciplined sales process Goals from the top of the organization are distributed evenly Goals are devised through econometric modeling and predictive statistics Company/BU “Maturity” Industry Predictability Advanced IT Systems Historical Data Knowledge of Customer High growth, immature industries, Bus. Units Co’s • Mature , Data Rich (e.g., CPG, Pharma) Account Planning Sales Management Strength Data Availability Stakeholder Involvement Understanding of market potential Best Practice Evolve from left to right …Don’t try to start too far to the right!

  15. Best practice is to strive to achieve the “ideal” distribution of performance to goal Target level equates to 100% of plan Excellence level allows 10% of sellers to earn upside earnings, it is usually set using historical data Performance level requiring minimal effort – set based on historical performance or fixed costs

  16. Across businesses and industries, there are essentially four approaches to allocating quotas to the sales force Equal Allocation • The overall business goal is divided by the number of reps • All reps receive the same quota Increasing Complexity, Increasing Precision “Last Year Plus” • An overall growth goal is identified • The growth rate to historical sales in the territory Opportunity Adjustments • An “average quota” is established • Adjustments are made based on territory opportunity “Bottoms Up” Market Potential • Territory potential drives the quota • Adjustments are made to ensure business goals are met

  17. Equal Allocation • The overall business goal is divided by the number of reps • All reps receive the same quota Approach Advantagesand Disadvantages Appropriate When… • Territories are equal in size, or when using an “open-market” deployment strategy • Applied to new products/services with unknown potential Applicability 16

  18. “Last Year Plus” • An overall growth goal is identified • The growth rate to historical sales in the territory Approach Advantagesand Disadvantages Appropriate When… • Applied to “annuity” businesses or products • Relatively consistent historical results and growth potential across territories Applicability 17

  19. Opportunity Adjustments • An “average quota” is established • Adjustments are made based on territory opportunity Approach Advantagesand Disadvantages Appropriate When… • Territories vary modestly, but there is still meaningful potential in all markets • Sales force and management have some history with estimating customer potential Applicability 18

  20. “Bottoms Up” Market Potential • Formulaic potential modeling drives the quota • Adjustments are made to reflect reality Approach Advantagesand Disadvantages Appropriate When… • Territories vary dramatically; higher volume does not necessarily mean better rep performance • Appropriate customer-level potential data exists Applicability 19

  21. An important input for account planning is the total potential in an account and your share of that potential Total AccountPotential + = Revenue Opportunity Your Competitors’ Account Revenue +Opportunity The revenue you realized from the account this year Total Potential + = Is it accurate? Is it reasonable?

  22. Rep A $2 million in annual gross margin 5% annual growth 100 customers in a 500 customer territory Territory has $10 million in gross margin potential (20% share) Rep B $1.2 million in annual gross margin 10% annual growth 50 customers in a 250 customer territory Territory has $4 million in gross margin potential (30% share) Discussion #2 Which should have a higher growth goal?

  23. An Approach to the Modifying Quota Process (High Level) Problem Statement and Solution Identification Tool Creation and Process Execution Rollout and Monitoring • Understand concerns about existing quota setting process • Identify systems and data availability/ constraints • Identify potential methodologies; select preferred approach • Develop quota setting and allocation tool to draft field quotas • Submit to appropriate field managers for feedback, adjustment, and validation • Gain approval by business leadership • Communicate quotas and supporting concepts to the field • Monitor performance against quota (and against specific assumptions used in the process) • Consider changes for future implementation

  24. Best Practices for Managing the Quota Setting Process Segment customers to determine differences in size, buying practices and growth rates Invest in data and methodology to calculate sales potential at the account or territory level Break down revenue into retained, penetrated, and acquired (new account) categories to understand the real underlying growth dynamics Understand sales capacity using sales process, time allocation, and funnel shape Consider ramp-up and onboarding pace for new hires Strengthen quota links to compensation with thresholds, accelerators On top of these techniques, the owners of the quota-setting process should expand periodic measurement, modeling and communication with the sales force to understand quota performance drivers

  25. Different segments covered by different roles may require distinctquota-setting processes 1 Strategic Account Managers Product Specialists CAMs Account Executives Inside Sales Reps $10 B

  26. Estimating Sales Potential by account sets up a more meaningful discussion about goals Best Fit Line y = 1253x+2918 $17,954 12 2 Sales Potential # Physicians in Practice

  27. Growth goals can be significantly easier or harder based on different retention trends 3 15% Net Growth Requires 35% Gross Growth Acquire 10% or $100M Year 2 Revenue $1.15B Penetrate 20% or $200M Year 1 Revenue $1.0B Churn 15% or $150M Retain 85% or $850M Growth Levers

  28. Sales is like any other work process… basic rules of time and motionstill apply. Quotas must also take sales capacity into account. Generate Lead Qualify Lead Design & Propose Negotiate & Close Fulfill & Deliver Service & Retain 4 Hours 6 Hours 30 Hours 25 Hours 45 Hours 20 Hours 1000 Leads 700 Leads 400 Proposals 200 Wins 200 Deliveries 170 Retained 4000 Man-hours 4200 Man-hours 12000 Man-hours 5000 Man-hours 9000 Man-hours 3400 Man-hours 4 Knowing sales potential is half of the equation… a good manager will also seek an understanding of sales capacity and raise a red flag when process yield doesn’t seem to match the business plan and quotas

  29. Quotas need to reflect the amount of time it takes to ramp up new salespeople 5 Ramp-Up of BDM New Hires Top 1/3 of New Hires Average of All AMs Average of All New Hires $K Middle 1/3 of New Hires Bottom 1/3 of New Hires

  30. A sound quota setting process produces the desired distribution of performance around goal and the appropriate awards 2:1 Upside +$50K 1:1 Upside +$50K Top 10% of Performers Target Variable $50K Base Salary TTC$150K 0% 100% 150% Performance Range $100K 6 4X 2X Target Total Compensation, pay mix, upside, and quota performance should work together

  31. “World Class” Quota Setting Practices Selected Goal Setting Variables World Class Practices Credibility of Methodology • Method is clear • Field input is possible • Process is consistent • Objective data sources are highly credible • Reps are able to “test” goals for reasonableness with some or similar data • Subjective estimates forced through a disciplined, collaborative process • Clear goaling philosophy and strategy • Where motivation is key, goal = “base hit” and stretch goal = “home run” • Manage distribution of achievement needs: if all must be stars, some great ones will leave • Motivate all performers • Decide and stick with risk to be borne by acct mgrs • Match income opportunity to risk • If exemptions are granted, set consistent policies Credibility of Information Motivation and Discipline Sales Culture Specificity and Flexibility

  32. Break Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012 31

  33. Quota Management Practices Survey Results Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012 32

  34. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  35. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  36. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  37. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  38. SurveyDemographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  39. Survey Demographics Consulting | Performance, Reward & TalentProprietary & Confidential | 10/2012

  40. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  41. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  42. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  43. Survey Demographics Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  44. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  45. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  46. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  47. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  48. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  49. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

  50. Quota Setting Process Consulting | Talent & Rewards/Sales Force EffectivenessProprietary & Confidential | 01332031.PPT 0149664 013012

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