This article was originally published on HBR.com.
Most sales forces use sales goals to focus attention on what’s important and give salespeople direction about what to do. Goals energize people and encourage them to keep going. Very often, companies link sales force incentive pay to goal achievement. This makes effective goal setting essential for directing and motivating sales teams and controlling sales compensation costs.
Even in today’s data-rich environment, it’s often difficult to overcome the uncertainty inherent in goal setting. Market and economic uncertainty can make it challenging to set reasonable and fair sales goals. Setting goals for new products is especially difficult. Goal setting is further complicated by digital channels and influencers who can sway customers differently and blur salespeople’s effect on buying decisions.
If goals are too high, salespeople tend to give up. If goals are easily achieved, salespeople get undeserved incentive payouts. And if some salespeople get goals that are too difficult while others get goals that are too easy, the perceived unfairness will distract the sales force and create dissonance.
What, then, are strategies that companies can use when the goal-setting process is likely to be error-prone? Here are seven of them:
Rather than setting goals that focus attention on a single number, define performance ranges. For example, rather than a specific goal, say of $2 million for a salesperson, set a “success range” of $1.8 to $2.2 million. Have incentive pay kick in at $1.8 million and rise with performance. If you are less confident about your goal-setting accuracy, have a larger “success range” with a slower rise in incentive payout.
This method works when you have a good understanding of how opportunity is distributed across territories but are uncertain of the overall opportunity. Assign each salesperson the percentage of national sales that he/she should contribute. Then allow dollar goals to rise or fall with national performance. The downside of the approach is that it can encourage salespeople to compete against each other, rather than focusing externally on beating competitors. You can achieve similar results without this downside by giving salespeople somewhat easy goals with modest incentives and allowing incentives to escalate with company performance.
When goals turn out to be unreasonable, short time frames limit the potential damage. This strategy works best in sales forces that execute many transactions with short sales cycles. With large deals and longer sales cycles, goals with short time frames may not allow enough time for sales variability to even out.
Such features are unpopular with salespeople and can dampen the motivation of top performers. Yet caps and decelerators do protect against excessive incentive costs when goals are set too low, especially for large deal sales with long sales cycles. A per-deal earnings cap will limit unwarranted incentive payouts for large windfall that salespeople do not significantly influence.
If you can’t predict sales, consider measuring and setting goals for the activities contributing to sales. These might include new leads generated, VP-level conversations, or joint sales calls to cross-sell products. Setting goals for sales activities can sustain salespeople’s motivation throughout long sales cycles. Activity goals work best as part of the performance management process but are generally not recommended for determining incentive pay. Activity measurement can motivate an increase in the quantity of the desired activity but a decrease in the quality.
Paying salespeople for goal attainment increases fairness when there are differences in opportunity across territories, provided salespeople’s goals acknowledge these differences. But goals aren’t needed for fairness if territories have equal opportunity, or if no single territory is close to tapping its opportunity. Goals are also less important when sales carryover is low (i.e., few sales occur without short-term sales effort). When a biotechnology company launched a new product in an unknown market, every sales territory had huge untapped sales opportunity. For the first year after launch, the company paid salespeople a commission on all sales, plus a small bonus if the company sales goal was achieved. In the second year, it was easier to forecast territory sales. The company began linking commissions to territory goal achievement.
Short-term sales goals are not the only way to direct and motivate a sales force. For example, if salespeople work in teams on large deals with long sales cycles, consider using an approach similar to a management bonus program. Instead of linking incentives to short-term sales goal attainment, use metrics reflecting long-term team performance and individual effort contributing to team results (for example, putting forth extra effort to meet with key decision makers or to engage company experts to help customers). As discussed in our prior HBR article, perhaps this shift in sales management philosophy is inevitable in today’s sales environment. Digital channels are reducing salespeople’s impact on sales and challenging companies’ ability to measure impact. This makes traditional goal-based incentives less effective for sales management.