Eliminating Sales Quotas may boost profits
A recent study done a team at Stanford Graduate School of Business has found that eliminating sales quotes may boost profits.
In one case, the new sales compensation plan without quotas resulted in a 9% improvement in overall revenues, which translates to about $1 million of incremental revenues per month.
Many business pay bonuses for meeting certain sales quotes but this new research suggests that quotas may undercut profits. quotas, sales went up $1 million per month.
“The fundamental problem is that managers never know exactly how much time and effort their salespeople are putting into their work,” says Harikesh Nair, an associate professor of marketing and one of the authors. “In the absence of such knowledge, they can only base payment on agents’ output, not their input.” Commissions, quotas, and bonuses based on performance are thus the typical staples of sales force compensation. Quotas, in particular, are believed to generate strong incentives by serving as targets or goals that encourage sales agents to work hard.
While commissions may spur effort, the quota carrot can sometimes result in people striving to game the system. So when they have meet the quote for this month they will then try to push the sales into the next month to help next months quota. There is a high incentive to try to manage the system rather than just get all sales possible.
This is a case of a bonus system and metric being implement without enough consideration being given to the dynamics of the situation. We need to understand the behaviour of the people to whom the metric affects and then consider the ramifications to the metric. This research highlights the fact that in designing a key indicator or a bonus system we must understand how people will react.
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