Almost 75% of surveyed sales-heads admit that annual sales targets are typically reverse engineered to meet board allocated growth targets, and then are further “refined” to allow for a cushion or comfort zone. Done so if even there’s a “sales miss”, there’s still a strong likelihood of the corporate goal being reached.
On its face, that seems like a reasonable strategy. But when you peel apart the numbers, this approach runs the risk of creating a sense of impossible goals within your sales team, and demotivating the folks you rely on to drive your revenue and your planned revenue growth.
Example
Wichita Widgets clocked $42MM in revenue last year, ending the year with 31 sales people split across 3 regions. The board has decreed 30% growth is required in the coming year, so they’re looking for revenue to hit $54.6MM – and they’ve allowed for a 25% increase in sales overhead to get there.
The Sales VP gets her bonus at $54.6MM, provided that sales expenses stay within the 25% cap. She tells her 3 Regional Sales Manager that their targets for next fiscal are $19MM, $21MM and $20MM – slightly different because of geography opportunity and experience level of their teams.
The VP has built in a 10% cushion – pretty small by current standards. The VP tells her managers that the average revenue per rep last year was approximately $1.35MM – and that the teams can grow by 20% in headcount and expense. The VP just gave herself another small cushion in the expense category.
Let’s take 1 of the RSMs and look and see what he does. He’s got 10 sales reps currently, and will expand his team to 12 very quickly – so each rep will have to do $1.67MM each to hit the RSMs annual goal – on which his bonus depends. He builds in a small cushion of 10%, and tells his team they’ll each be getting a target of $1.84MM and will each lose approximately 20% of their territory and assigned accounts. There are small variations between the reps because of opportunity variants in each territory – but the averages are pretty close to reality.
. . .
Then, let’s look at Brendon – one of the sales reps in this region. He hit his goal last year of $1.36MM and is looking forward to going to President’s Club with his girlfriend. In fact, the Sales VP was pretty clever last year by sending Club reminders and teasers to Brendan’s girlfriend, as well as the spouses and significant others of all the sales team … the VP knows that a supportive partner and a motivated partner is good for her sales reps production.
But here’s the problem … Brendon bust his tail last year to hit Club (that’s good, he should!), and really leaned on a few of his long-time customers to accelerate their January order into December – so he already knows January is going to be a little lean. He also knows that the week out for President’s Club, his mid-year two week honeymoon, a couple/three days out for his bachelor shin-dig, and the sales training course that has become pretty standard fare year after year (as well as the distraction of his upcoming wedding) is going to suck at minimum five, if not six, working weeks out of his year.
So he does the math – if he has a weak January (say the equivalent of losing 2 weeks results), plus 6 weeks dead time for “the distractions” leaves him 10 working months. August is notoriously tough, so in his mind he’s down to 9.5 months – and everyone knows you lose a little for Thanksgiving and Christmas/Hanukkah, so now he’s at 9 months. Last year he did (in his mind) approx 114K a month; this year he needs to do $204K a month. Oh and by the way – he lost a slice of his territory and assigned accounts!
Brendon has calculated that his quota just went up by 79%!! Even taking all of Brendon’s inaccurate assumptions and poor math out of the equation – he’s still had a greater than 35% increase in his quota – and has lost 20% of his opportunity base.
In reality, Brendon’s RVP will likely assign him a target higher than $1.84MM because the two new reps they’re hiring early in the year will need ramp-up time, and they won’t be carrying the full target. So, their planned shortfall will have to be allocated to the current sales team; and that will increase their targets to something close to $1.95MM. So that will increase Brendon’s worst case view to $217K a month, or an increase of 89% over prior year – or more accurately (without Brendon’s assumptions and math issues) a quota increase of more than 43%.
What do you think will be listed on Brendon’s “Reason for Leavin’” survey?! The one the CEO looks at when he gets distressed that one of his top sales reps has quit. I’d bet a pretty healthy amount the reason won’t be “you all – at every level – screwed up the targets, gave me a number I can’t hit, and this job doesn’t make sense if I’m not making the comp plan and bonus plan sing!”
Multiply that level of mental gymnastics and angst across the entire sales team, and you have a pretty good chance that your top people will leave! At best, they’ll disengage for a while, the team morale will take a dive, the “ra-ra” reps from last year won’t be anywhere near as encouraging to the rookies and those that are struggling; and …….. you’ve got a problem of epic proportions.
You can’t solve all of this. Some of it comes with the job. But there are much better ways of setting annual sales targets. And we’ll cover some of those suggestions in a future post…