David Keim co-wrote this post with Tanya Chaturvedi.
For many sales reps, goals and quotas are a key component in their compensation plans. According to ZS’s Incentive Practices Research (IPR) study, more than 70% of the survey participants (sales plan administrators at pharmaceutical and biotechnology companies) use goals or quotas as a component in their compensation plans.
Goal-based plans are popular for a reason: Sales reps are naturally motivated by goals, and a fair and well-designed sales compensation plan can help inspire them to excel. In order to reap these benefits, however, the process of goal-setting must be thorough and rigorous because a few common mistakes could threaten to demoralize the sales force and result in lower sales. Here are three typical mistakes, and how you can avoid them:
1. Setting unbalanced goals: According to the IPR study, the No. 1 challenge that pharmaceutical incentive compensation managers face is quota-setting fairness and accuracy. If the forecast isn’t allocated correctly among the reps, it’s possible to set unbalanced goals. In this situation, some reps would have goals that are unachievable, and others would have goals that are too easy, resulting in suboptimal performance from both groups. For maximum motivation (and sales), care must be taken to allocate the goals so that each rep has a challenging goal but not an impossible one. To ensure fairness, all reps should have an equal opportunity to achieve their goals, and goals shouldn’t favor one group of reps over another.
A fairness-testing process can provide some insight into how a goal-setting methodology may be biased. A simple example would be to check the correlation of goal attainment with a territory attribute (baseline sales, growth, market availability, etc.). If, for example, the correlation of attainment with baseline sales were high, then the goal-setting methodology in question would be favoring the larger territories over the smaller territories, and should be revised. Managers should also have an opportunity to provide feedback on the goal-setting process in case there are some extenuating circumstances that could affect a territory’s sales.
2. Using an incorrect forecast: One of the most common errors in goal-setting is to use an incorrect forecast. In fact, national sales forecast accuracy ranked No. 4 on a list of most common challenges, according to the IPR study. The overall attainment (and payout level) that the reps achieve is dependent on the accuracy of the forecast, so it’s critical to get it right. If the underlying forecast is too high, the resulting goals will be unachievable for most reps. This leads to demotivated reps who either give up altogether or defer their sales to a later period for when their goal will likely be lower. If the underlying forecast is too low, most of the reps will easily achieve their goals and receive large payouts without any pressure for them to overachieve. As a result, their sales will be lower than they would have been had the goals been correct.
It’s also important to be flexible with respect to sales goals. If the forecast should change substantially after the goals are set, it may be necessary to revise the goals to better represent the latest expectations.
3. Lack of communication: Finally, it’s important to keep field perception in mind when designing a goal allocation methodology. An overly complicated plan, even if fair, can still hurt field performance: If the reps don’t understand how their performance relates to how their goals are set, it will hurt their motivation.
Given the near universal popularity of goal-based plans, goal-setting will continue to be an important topic in designing incentive plans. If goals are correctly designed, they can have a great impact on overall rep motivation and sales.