How to Design Sales Rep Compensation Plans with No Quotas
How to Design Sales Rep Compensation Plans with No Quotas:
The most common mistake companies make when designing sales rep compensation plans is to use a top down quota setting approach. “Top down” is defined as developing the revenue goal for your next fiscal year at the executive level and then spreading those dollars across the sales territories. This doesn’t work for a number of reasons, including a failure to understand territory potential, sales rep capacity and market conditions.
Proper sales compensation planning requires heavy data analysis and something most sales leaders don’t have: Time.
It’s December 15th and 70% of corporate America is kicking off a new fiscal year in 16 days. If the above scenario applies to you, a solution worth considering is to eliminate traditional quotas and focus your sales compensation metrics on rep productivity in 2012.
In figure 1 below, the rep has target earnings of $150K for the year. The company earns a 30% margin on dollars the rep sells. As you look at the cost models in figure 2, you can see how the rep’s production and subsequent variable compensation payouts begin to impact variance to margin. At $500K in revenue production and a 5% commission rate, the leftover gross margin is $25K. Based on the remaining SG&A expenses for most companies, this will not allow the company to “breakeven.” Two options to mitigate this:
- Lower the commission rate to improve the margin
- Set a “minimum expectation” in which the rep produces enough to pay for the cost
Your ability to correlate the sales rep’s production to cost is critical in this model or it will not work. If you are asking how a rep without a goal will ever get out of bed in the morning and go sell, the answer is in the commission rate. Once you determine your breakeven point of sales productivity minus cost of the sales rep, set a minimum performance standard and raise your payouts accordingly. In the rep’s mind, motivation shifts from quota attainment to commissions earned, right where you want it.
If you are wondering how this solution avoids using a “top down” approach, you are asking the right question. It doesn’t. This method removes the trappings of artificially-based quotas because the company didn’t do its homework on territory potential, sales rep capacity and market conditions.
The call to action is this: Don’t wait until December 15, 2012 to set your quotas for FY13. Schedule the appropriate time next year to properly research your sales rep compensation plans.
If you are interested in a resource to assist you with your territory design efforts in 2012, register here for our webinar today at 1PM Central time: “Instant Improvements for Segmenting Your Accounts”- How to Determine the Real Potential of Your Territory.
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