Can You Increase Revenues by Eliminating Sales Quotas?

Conventional wisdom in most industries says the best way to maximize revenue is to link a sales rep’s compensation to them reaching aggressive sales quotas.  A new study from the Stanford Graduate School of Business challenges this notion.

The research found that sales quotas could hurt revenues by encouraging sales reps to manipulate or “game” the system to their benefit.   While the amount and type of gaming varies by company, two pernicious examples are common:  pushing and sandbagging.  Pushing occurs when a sales rep postpones recording new sales until the next quota period once they achieve their current period target.  Alternatively, if a rep perceives they have no chance of making the quota in the current period they could have a perverse incentive to postpone their effort to the next period. Sandbagging happens when the rep convinces management to set overly conservative sales targets.  Since these targets are easily achieved, the sales rep has little incentive to sell more especially if they are not compensated for “stretch” results.  Overall, gaming behaviors may hinder revenue generation, complicate forecasting and potentially result in higher than necessary bonus payouts.

Gaming occurs when management lacks important information on the sales process, customer needs and value proposition.  In particular-

  • The level of each rep’s effort (time and skill) during the sales cycle
  • The product or service’s value proposition
  • The client’s buying behavior and requirements

In the absence of such knowledge, managers can only base targets and compensation on a rep’s results, not their input.  Whether by design or sales culture, a rep will often use their asymmetric information to maximize their effort/compensation payoff though not necessarily the firms’.

To test the impact of changing quotas on revenue, the researchers built a mathematical model using actual company data to measure the impact on sales performance under different quotas and gaming scenarios.  The model showed that total revenues actually increased when quotas were removed.  The authors then applied the learning to a real world setting; they tested a quota-less sales plan at a Fortune 500 company. The results were impressive; the new plan saw revenues rise 9%, or $1M per month.  Contrary to what you might think, the sales group embraced the quota-less sales system and the level of gaming fell dramatically.

Removing quotas is not for every firm. In fact, changing rep compensation is often a “third-rail” conversation.  However, better understanding the link between compensation, behavior and results could help managers optimize sales planning, target setting and staffing.  One good place to start would be for sales leaders to comprehend how their sales processes and incentives are related to clients needs and product value.  As well, sales managers could also review historical data – by firm or individual – to explore the impact on revenues by changes in quota targets and compensation. 

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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