You’re Setting Quota Wrong Webinar

Learn the neuroscience and psychology behind how quotas are the key to a 15% increase in sales.

This webinar will teach you how to:

  • Motivate your team

  • Manage your employees

  • Get your team paid

  • And keep your employees laser-focused

Key Takeaways:

  • Top-Down planning looks good on a spreadsheet, but won’t help your rep

  • Quota periods should match a rep’s visibility

  • Bottom-Up forecast gives you a sense of the “natural” breaks

  • Commit to 80%+ attainment

You’re Setting Quota Wrong Transcript
Sanj Sanampudi (03:39):
I’m Sanj Sanampudi, Co-founder and CEO here at Concert. Concert is a platform that allows you to design your comp plans and also track your commissions seamlessly. A lot of what makes us different is that, as Rich mentioned, I’m a former CFO, myself. My team was always designing and managing comp plans. The interesting thing that happened when we started Concert is we started seeing patterns about how comp plans were performing. So some companies had plans with certain features that seem to be doing really well and others had plans with other features that didn’t seem to do well. So we worked with neuroscientists and behavioral psychologists to understand what goes on in our brains when we see comp. That really is the foundation for our agenda today, sharing some of the work we’ve done with scientists to figure out is there really a science to commissions? Spoiler, there is. So our agenda for today, we’re going to try to make it quick and take as many questions as we can, but our agenda for today is to first talk about why we are boldly saying that you’re setting quotas as wrong.

I don’t really know many of you. I don’t know your plans, but I can tell you, you’re probably doing it wrong or approaching it wrong. When I look back on my own career, I think of all of the really, really nice, passionate salespeople that I accidentally screwed over, or the times that I was accidentally lucky and set the right comp plan. Then we’ll go into the science of commission. So what is actually happening in your brain, in your body when you’re getting a commission plan, how do we perceive quotas overall and get you to the place where you can actually set smarter targets for your team on your own? 

(05:59):
So you’re setting quotas wrong. Mainly, we know it’s broken because we see stats like this. So you can see a longitudinal study from CSO insights in the Alexander Group that shows a quota attainment from 2011 to 2016. It was dropping from 60% to about 50%. They actually stopped keeping the time series of that data because it just didn’t get better. It was mostly depressing for everyone who saw it. I think for many of you, you can test this against your own experience. Did it seem like most of the team was hitting quota or most of the team wasn’t, or it was evenly split? I think a lot of people anecdotally can see this in their own experience. But we know that there’s a different way to think about targets and I’ll put Rich on the spot and hope he doesn’t remember the answer to those from our prep session. But do you remember what the most common marathon finish time is?

Rich Sgro:
I don’t remember, but I remember still thinking I was like, that would be really fast for me. So probably faster than six hours. That would be probably my guess. It’s about how long I could do a marathon.

Sanj (07:19):
Good guess. It is faster than six hours. It’s three hours and 59 minutes. More than the time itself, I would encourage everyone to look at this graph where you see these milestone times in blue and how performance increases up to the milestone time and drops off right afterward. So the difference between 3:59 and 4:01, there’s a 40% drop off in performance. What we’re learning from this marathon example is that we’re wired to want to hit targets. Targets matter a lot. When you have something like quota where 50% of the team is not engaging with the target, you know that we’re setting it wrong. So taking a step back, we wanted to know what actually is going on in our brains when we’re getting commissions? How is a commission plan helping us get better, be motivated? How does it all work? The resounding research that we got back was they’re a feedback loop. So feedback loops answer three questions, where am I going? How do I get there? Based on where I am, where do I go next?

It’s kind of like a GPS in your brain and what we’ve seen from our own experience and from some of the customers that we’re working with is really when we think about commissions, this is where all the nonsense about coin-operated sales reps comes from. It’s because we’re trying to lead from the very end of the feedback loop, but the commission is really the outcome of everything else. So our brains, from that marathon example, are target-driven. So quotas are actually the mechanism that you’re going to use to focus and motivate your team. Quotas are the place that you lead from and commission is really the output from it. A number of studies, they showed that ability to achieve the target matters more than the reward on the other side. There are also a few things that happen in our bodies. So we know targets matter because our bodies change. Our blood pressure goes up in a safe way, not about to kill us, but if a target is moderately challenging, our blood pressure increases. Our blood pressure increases to prepare to physically move and that happens even if they’re intellectual targets.

Rich:
It’s interesting the impossible actually is the lowest of the bunch. It’s like it’s not even a goal at that point. That’s fascinating.

Sanj:
It’s the myth of the stretch target. The stretch target is a number that someone once wrote that means almost nothing to anyone.

Rich:
And no one’s worried about it because they, “Ah, it’s completely unrealistic. I’m not even going to… There’s no chance in heck.”

Sanj:
You should actually set stretch targets if you want your team to be really calm and relaxed and feel very complacent.

Rich:
So you’re saying we are setting quotas wrong then, Sanj.

Sanj (11:09):
Correct. The other thing is what actually happens in your brain when you get these targets. So if you get targets that you feel like you can win, that you’re coming close to winning, these white parts in these scans are electrical pathways that are fired up in your brain. So this is neural activity and the parts that are lit up are the parts of your brain that help you learn. So whether you’re winning or you’re even coming close to the target, you’re actively learning. So everything we know about reward-based learning, about commissions, about how these programs should work is that if we set the right targets, we are going to be more receptive to learning the behaviors to get there, we’re going to be more able to think about creative solutions to get there, and we’re going to be more prepared to act on opportunities. We’ve seen this in our own work. So smarter targets help teams perform better.

We worked with a company that had about 30 reps. Their quota was about $50,000 a month. On average, the team was attaining $30,000 a month. Our algorithm said that they should drop quota by 15%, which they did. Then over the next three months, their average attainment went up by 15%. For people who are like, “$4.5K a month, that’s not a lot”… Well, over a year, that’s about $55,000. In over 30 reps, that’s about $1.5 million of ARR that this company is bringing in by changing their targets. So the goal of this session is hopefully I’ve made this compelling case where you’re like, “All right, maybe we’re setting quotas wrong.” The goal of this session is then to walk you through how can you approach quotas differently. What are the frameworks and the tools to think about quota in a way that’s a little bit more rooted in the science and a little bit less rooted in the stories that we all hold personally in comp.

Rich:
I think that was one of the things when we were doing the prep session and Sanj shared both this program and tomorrow’s, it does challenge conventional wisdom, and it is a little bit uncomfortable to think for all of us who’ve set quotas for however many quarters and annual planning cycles we’ve been through, that there are some fundamental things that we’ve been maybe lucky to get right, but we’ve been either incongruent or wrong more often than not. I think that this part of the program is super illuminating for me and I’m hoping that as Sanj shares this, that folks, as you have questions about this, if you don’t agree, go ahead and feel free to challenge on this because it is definitely thought-provoking. So Sanj, I just wanted to give that caveat before you hop in here.

Sanj (14:39):
Yeah, sure. So how do we perceive quotas? How do we perceive targets? We look through four lenses. This is a theory in psychology called construal level theory. The four lenses that we look through are spatial. So it’s something big or small, how far away is it? Temporal, is it close to today, close to this moment, or farther away? Experiential, are these skills or achievements that I’ve had or are they theoretical. Social, is this something that is relevant for people I associate with? Or is it for another group? Combined, this distance is called the psychological distance. So we’re going to about the psychological distance of your targets. This is probably the squishy part, but I promise it will get more tactical. So why does construal level theory matter? Why does psychological distance matter? So the shorter the psychological distance, the more capable our brain is to translate these abstract targets and goals into really specific actions to get there.

The example that we’re going to use through these four lenses is saving for retirement. So spatial distance, this again is just like the size of the target. Is it large or small? Is it a complex target to get to versus a simple target? So in the retirement planning world, the current estimate is that someone needs 1.7 million dollars to retire. While you were all panicking about that, you can also think about setting aside $500 now. So just a magnitude of $1.7 million versus $500, I mean, $500 now is also a lot, but it’s less than $1.7 million. In the sales world, that translates in two ways. So on the sales side, when we’re setting quotas that are a million dollars a year, are you setting a million-dollar number because it’s big and round and nice? That might be something that feels good on the spreadsheet, but it’s probably something that optically makes the number look bigger. It’s the same thing as pricing with 99 at the end. Even if you made it $999,999, that is better than $1 million. That is spatial distance. Six figures is less than seven. The complex versus simple, I would point to more what we see in CS plans. So if you are giving your account managers a 95% gross retention target, that is a lot of math that you’re dropping onto the account manager. So they’re trying to think, “Oh, the aggregate portfolio that can renew now has this book of business, so I need to close this much and how am I going to make that?” How do you translate that into an action? As an account manager, you’re probably just trying to do the best for each deal that you can. So one thing we advocate for through this lens is especially on the CS side, like move away from these efficiency metrics and try to move and push yourself to these nominal figures. So something like you need to renew or book $950,000 in Q1. Notice, I said less than $1 million.

Rich:
I think I’m laughing right now on mute here because I think there’s, especially for the more operationally minded, we’re going to pay for everything and we’re going to have all of these different levers and then you need an applied math degree to figure out how much you’re going to get paid, which is an account executive or is a customer success manager, Sanj, to your point is not the right use of the time for those folks or for the ops person to walk through the comp spreadsheet with 16 sellers every quarter.

Sanj:
Right. And again, it’s translating a target to a specific behavior. Where am I going? What do I do to get there? And what do you do to get to 95% gross retention? I don’t know. That’s really the answer that most people would give you. What do I need to do to paper $950,000? That’s a little bit more intuitive to break down into actions.

(20:08)
So the next lens is temporal distance. So this is the future versus the present. So back in this retirement example, it’s $1.7 million to retire in 40 years versus setting aside $500 this month. Time matters a lot in how our brain processes activities, but probably the most famous study on temporal distance was one that was done on how people perceive vacations. So if I asked you what a vacation looked like that you wanted to take a year from now, you’d be like, “Well, I want to go somewhere warm. I probably want to go to a beach.” You would talk in these abstract goals. When that same question was posed to you three weeks away from your vacation, the answer started shifting to, “I want to go to this restaurant. I want to read this book. I want to listen to this podcast.” So the way people described their experience became much more tactical. And the same thing happens in sales and the way to think about this is if you have annual quotas, think about quarterly. If you have quarterly quotas, think about monthly, and probably the most nuanced part of this is if you only pay on closed won, start thinking about paying on pipeline activities. So again, you’re trying to bring people a little bit closer in time to what they can really control and they can visualize success for. 

(22:03):
So the next lens is experiential distance. This is how easy do we make the theory of the right thing versus the practice of the right thing. So in our retirement example, the theory is like, “Yeah, I can deposit money into my retirement account. I would want to do that. I know I want to retire one day.” The practice of it is much simpler when it’s automatically deducted from your account. For experiential distance in sales, what we really see works well is usually more similar to the bottom-up forecasting that teams are already doing now. I think when we work with customers now, we see that their top-down budget usually takes priority. And the bottom-up forecast is a nice thing that you do to see how much of a stretch budget is going to be. But really, the value of that bottom-up forecast shows up in experiential distance because these are the numbers your team has actually hit before. And when you take that one level down, these are the numbers that your team knows these scripted behaviors to hit again.

Rich:
Sanj, I have a question on this. So when we talk about quotas based on prior performance, I think that makes sense, conceptually. What does this mean, practically? Does this mean on a person-by-person basis? So Sally did $800K last year. Her quota is going to be $850 or does it mean… Can you just expand on that a little bit?

Sanj:
We’ll actually go through this in an example in a second, but what you’re looking for are your team’s performance in aggregate and where you see aggregate sort of plateaus or breaks of performance. So like, “Oh, a bunch of people get to this level,” and then no one gets to one more deal past that. That’s how we get people to think about this. The other way to think about experiential distance, and it’s tied into that same example, is think about accelerator tiers or achievement tiers, to create a progression to get up to quota. So if Sally said $850K and I have only closed like $400K on my best quarter, maybe set it here at $425K and then another one at $670K and then another one at $850K. So build my way up there. 

(24:51)
The last lens is social distance. This is like the OG social distance. It’s really the notion of other groups versus my group. In the retirement example, what you see with retirement plans is there’s actually a really low participation rate in companies that are opaque about how many people are contributing through the company plan. It’s unclear if other people are saving. When you’re able to post something like 90% of the company is saving through our retirement plan, it is really easy to move the needle from 90 to 97% because people are like, “Oh, I’m like everyone else here. I should be saving, too.” Social pressure is real even after high school. In sales, this translates to that original graph I just showed you. If 50% of the team is hitting target, 50% of the team is not hitting target. It’s a coin flip. It doesn’t mean I’m good or bad. It’s just like, “Ah, that’s what I got this month. That’s what I got this year.” If 80% of the team is hitting quota, stakes are raised. “I’m part of the 80%. I’m part of the team that’s performing.” That really, really dramatically changes the notion of how we set quotas, how we think about quotas, and how much of the teams should be hitting quota.

(27:03):
So how do you set these smarter quotas? This is a real example of 10 reps who had a quarterly quota of $90K. We had an average sales price of $10K, the sales cycle was 30 days. You can see the performance here, the team wasn’t doing well. Another way that you would know that the team was not doing well is the sales team was transferred to me, the CFO. You know things are really bad if the CFO’s running sales. So not knowing anything about sales, I was at a loss, but I know a ton about math. So I tried to map my way out of the problem and it accidentally worked. So this is how we would look at it today. This is the real answer that I didn’t know before, but the spatial distances to $90K versus on average attaining about $20K, the temporal distance was they had quarterly targets versus a monthly sales cycle. So if I’m thinking three months out, well, I actually don’t even have visibility to three months out. How do I translate that to a behavior?

For the experiential side, there were no progression or targets. And on the social side, no one got to quota. Everyone missed it. It was a bad quota. So we now use what we call a plan performance graph. You can make one of these at home, a lot of you are ops folks. I know you can do this. On the X-axis, you’re going to have dollars or units and try to space them one average sales price apart. On the Y-axis, you’re going to have the percent of the team achieving that level of quota. You’re going to look for big drops, and then you’re going to try to build a pathway to your target. So what you can see here is I had close to 100% of my team able to close $10K a quarter, great job, everyone. It’s more like 80, 90% were getting to $20K, and then whoosh, I lost about 40% of my team’s performance once we got to $30K. And then again, you see a big drop-off at $50K. I knew the thing that made the financial model work was that $90K. So I wanted to build this pathway up to $90K. What is really cool about this experience is it makes me look super smart because three months later, this is what my team’s performance looked like. What’s even cooler is once people reach that first milestone, they don’t want to fall backward. So they’re looking for that next step, that next accelerator tier, looking for two deals away. Right now, this team is actually hitting about $90K a month. 

(30:25):
The final lesson is the cheat sheet. If there’s one lesson to impart, it’s that quota is not for the company. It is for your reps. The only people who get any benefit from this number is your team. It focuses them, it motivates them, it helps them translate these abstract ideas into concrete behaviors that they can do every day. Your top-down planning looks good on a spreadsheet. It won’t help you hit your number. That’s the spatial distance idea of lower your targets and build intermediate targets up to quota. Your quota period should match reps visibility. So try to match your sales cycle where you can and if you have longer sales cycles, definitely try to add in components where you’re paying on pipeline stages. That’s one way to break down this really long, year-long sales cycle. What do I do next? You should be sharing this content piece with them. And if you do that, you get a SPIF. The bottom-up forecasts that you are doing can give you a sense of those natural breaks, use the prior performance graph that we just reviewed, and commit to 80% or higher quarter attainment. The social pressure of quota is really holding you back if you’re not at that level.