"How'd you come up with my quota?"
If you're in sales, you'll want to read this
There’s been a lot of technical stuff written about optimizing sales orgs and structuring sales rep comp. I’m not here to do that today. What I have are three rules of thumb, without a ton of statistical evidence, but a lot of gut feel and experience behind them. They’re less than scientific, yet also tried and true.
One third of your sales reps should be individual quota carriers.
A rep’s quota should minimally be 5x their on target earnings.
Plan for 80% quota achievement.
“One third of your sales reps should be individual quota carriers.”
The typical sales “pod” is built around one quota carrying rep. A rep is an individual contributor, a mercenary carrying a bag and bringing in new deals. That rep has a manager, a system engineer responsible for the technical part of the sale, and a business development rep who passes leads. The rep’s manager may have a span of control of six to eight other reps, while the system engineers and SDRs pull single, double or triple duty, supporting multiple reps depending on what segment they cover (lower ratios for enterprise, higher ratios for SMB).
But the food chain doesn’t stop there. The manager probably has a manager, the SDR supporting the rep has a manager who probably also has a global manager, and on it goes up to the VP of Sales. This quickly becomes a lot of mouths to feed and not so many people closing their own deals. And this is before adding in any of the other supporting resources like sales ops or the neck beard who fixes your computer.
Roughly speaking, you want 1/3 of your sales department to be individual quota carriers. A ratio less than this could indicate you’re running a bloated ship. It could also signal you don’t have enough quota deployed to feed all those mouths.
“A rep’s quota should be at least 5x their on target earnings”
Now that we can’t un-see the pit crew of resources attached to a single rep (yes, I watch F1 Drive to Survive on Netflix, no, I don’t know how to change a tire), let’s talk about what reps get paid. Let’s say you have a rep on a 50 / 50 plan - $100K base, $100K variable, for a total on target earnings of $200K. Minimally that rep should have a quota of a million bucks.
Flipping that on it’s head, their contribution margin to the business should be around 80% if they achieve 100% of their plan. You get into trouble when you start building teams with highly paid reps holding only moderately high quotas. This is the proverbial “no-man’s land”. The company isn’t necessarily losing money, but it’s not really making any money either. This issue is exacerbated when you have a big chunk of new, expensive reps ramping and building pipeline, which may take up to nine or ten months in the enterprise, while bringing in zero cash flow.
Plan for 80% achievement.
At most companies there’s an operating plan, a board plan, and a street plan (if you’re public). Your operating plan is the largest number and allows you to shoot for the moon. But if you come up short, instead of landing on the stars, or however the saying goes, you should land on your board plan. This gives you enough wiggle room to take some bets on new geos and verticals, which may or may not pan out, while guarding against fluctuations in seasonality and macro economic factors. This is the classic under promise, over deliver.
You can take it one step further and “over deploy” quota by a percent or two at each step of the sales hierarchy to account for employee attrition, speed to hire / ramp new reps, and big deal risk. In fact, it’s normal to have 20% to 30% annualized attrition on sales teams - a lot of reps quit when they’ve determined they won’t hit their number, or management cuts the dead wood.
But be careful when over allocating. You don’t want to take it too far. In the words of maybe Larry Ellison,
Sandbag me once, shame on me. Sandbag me twice, you’re back to selling shovels at Lowe’s.
-Probably Not Larry Ellison