By Andris A. Zoltners, PK Sinha, and Sally E. LorimerThis post is part of the HBR Insight centre Growing the Top Line.
Companies set goals for their salespeople and most link incentive pay to goal achievement. Many advocate using stretch goals to improve the company’s chance of achieving financial targets, reasoning that challenging goals motivate salespeople to think big, be creative in finding ways to create customer value, and attain performance levels never thought possible. But is that always the case? Although some level of stretch in goals motivates, too much stretch leads to goals that are unachievable. Salespeople disengage, and sales come in even lower than they would have been had goals been set at a reasonable level. Higher sales goals lead to lower sales. Especially in today’s economic doldrums, we often see company-level sales goals based on wishful thinking rather than on market realities. A higher sales goal can’t make up for a soft market.
Five examples illustrate the ways that higher sales goals can lead to lower sales.
1. Ambitious company executives: When a computer manufacturer launched a new server line, executives set a company sales goal based on optimistic expectations, not on analysis of market realities. The goal got handed down to the sales force. Salespeople figured out quickly that the goals were unattainable, and they all but stopped selling the new line to focus on other product categories with achievable goals that enabled them to earn more money. The goal-setting error hurt the company’s entry into the server market and made a bad situation even worse.
2. Systematic padding: At a professional services firm, the VP of sales added 5% onto the company goal to ensure a safe cushion before passing it down to the regional level. The regional directors tacked on another 5% before allocating goals to the district managers, who added their own 5% safety net. By the time the process got down to salespeople, territory goals summed to 15% above the original company goal. Salespeople perceived the goals to be unrealistic, and only 30% hit their individual number. Yet at the national sales meeting, the VP congratulated the team for hitting the overall number. The situation frustrated the sales force, many top performers left to join rival companies, and the VP was gone within two years.
3. Unanticipated market dynamics: At a financial services company, annual sales force goals were set in a booming economy. When recession hit in the second quarter, it became evident that the goals were unrealistic. By the end of August, fewer than 10% of salespeople had any chance of making goal. Salespeople became discouraged and angry that the company was treating them unfairly. Most “checked out” and began holding sales for the following year, when they hoped that goals would be attainable. Leaders contemplated reducing goals mid-stream to reengage the sales force, but feared this would compromise goal-setting integrity.
4. A flawed goal allocation formula: Leaders at a healthcare company set a challenging, yet reasonable company goal of 20% sales growth. They gave each salesperson a goal equal to 120% of the amount he or she sold last year. Top salespeople lamented that the goals were unfair. “I had a great year, so they ‘reward’ me with a tougher goal, even though I’ve already captured most of my territory’s potential.” The discontent of top performers was exacerbated when they saw that their peers with a lower sales base (and therefore lower goals) were exceeding goals easily without working hard. Top performers reasoned, “I’m not going to make goal this year, so the best strategy is to hold back so I get a low goal next year.” An allocation that failed to acknowledge differences in territory opportunity created unintentional stretch goals for the company’s best performers, alienating this critical group.
5. “Challenge the stars” logic: “When headquarters gives me a difficult regional goal, I give a disproportionately large share of that goal to my strongest performers — the ones I can rely on to deliver,” explains one sales manager. With this logic, weak performers get easier goals, and the best salespeople are not rewarded enough for their hard work and superior results. Strong performers observe poor performers making more money for less work, and the impact on morale can be devastating.
Sales force goal-setting is challenging, given forecasting uncertainties and diverse business conditions across local markets. Salespeople sometimes complain about unreasonable goals for legitimate reasons, but other times they are sandbagging. All sales leaders want to challenge their salespeople to be the best that they can be, and most believe that stretch goals are motivators. When 10%-to-20% of salespeople miss their goals, the problem is most likely the salespeople. But when the majority of salespeople miss their goals, the problem is the goals.
Andris A. Zoltners is a Professor Emeritus of Marketing at Northwestern University’s Kellogg School of Management and a co-founder of ZS Associates. PK Sinha is a co-founder of ZS Associates and a former Kellogg faculty member who continues to teach sales executives at Kellogg and the Indian School of Business. Together with Sally E. Lorimer, former Principal of ZS, they are the authors of Building a Winning Sales Force.
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