To ensure greater sales produc­tivity and effectiveness in today’s competitive business environment, many organizations have migrated to “pay for perfor­mance” sales compensation plans. The “pay for performance” con­cept has received a great deal of attention in recent years, much of it undoubtedly well-deserved. After all, the concept has allowed many firms to create more aggressive sales organizations and to increase productivity.

Why then, amidst all the fanfare, do some sales managers find their “pay for performance” plans to be ineffective in gener­ating desired sales and profits? Why do their salespeople appear to be somewhat non-aggressive and demoralized? In many cases, the answer lies in the four-letter word: GOAL.

THE UGLY. Perhaps one of the greatest reasons “pay for performance” plans fail is that management assigns stretch goals, which is often code for unrealistic goals that sales man­agers know the sales organization will have difficulty achieving. Although some degree of stretch

may be desirable in certain envi­ronments, often such goals result in a “lose-lose” situation for both the company and the sales organization.

Why then does management set goals in such a manner? In most cases, management convinces itself that if the goals are set 20% to 30% higher than the firm’s true expectations, the company will still reach its goals even though the individual salespeople may miss their personal goals.

Unfortunately, under such scenar­ios, the sales organizations not only miss by 20% to 30 %, but often by as much as 40%. The reaction of most sales organiza­tions is quite typical. The sales­people begin to question their own skills and management’s judgment. Morale plummets and resumes begin to circulate. The hidden and not-so-hidden cost consequences to the firm are usually enormous under such circumstances.

THE BAD. In setting goals, many sales man­agers frequently follow the dic­tate we so often preach, set the individual sales goals equal to the internal goals of the firm. Such an approach will help ensure that the organization either rejoices together or cries together. Although their intent may be commendable, often their processes break down when selecting the information upon which they will base their deci­sions. The most common mis­take made by sales managers is to base the goal setting process solely on sales history. A com­petitive sales environment does not allow long-lasting success for those companies continually looking to the past for answers.

Why do managers continually set goals based solely on sales history? One explanation may be rooted in the idea that many sales managers do not know what other data to use in mak­ing their decisions. Perhaps an even better explanation is that some sales managers are uncer­tain how to identify, size and account for potential, economic conditions, channel shifts and other factors typically included in solid goal setting processes.

An example of a bad situation that often arises when sales managers fail to consider poten­tial in setting goals is penaliz­ing good salespeople who have deeply penetrated their markets. Better performing salespeople will have a limited number of prospective customers, while poor performers will continue to have significant opportunity. As one salesperson has stated, the best solution under such a sce­nario is to “quit and then get re­hired to sell in a territory which has been under penetrated.”

THE GOOD. Good goal setting processes will link the individual sales­people’s goals to the firm’s goals. Tougher environments may require that the goals be set slightly lower than the inter­nal goals to ensure a significant, portion of the sales organiza­tion “remains in the game” and a positive morale is maintained. It is also essential that goals be set based upon a combination of considerations: sales history, potential,. economic conditions, channel shifts and any other market conditions impacting the selling effort.

Good goal setting processes will attempt to encompass all of the above considerations where appropriate. Although such a process will undoubtedly require a significant degree of thought and analysis, many sales man­agers find that the subsequent returns more than offset their efforts. Often the resulting goals will be viewed as highly equitable by the salespeople. More importantly, they will be supported by solid rationale. Good performers will not be penalized and thus will be encouraged to aggressively pur­sue sales growth. Areas requir­ing additional or reduced staffing and resources will also be more evident.

If done incorrectly, goal setting will often create significant productivity problems in the sales organization, resulting in a “lose-lose” situation for the firm and the salespeople. Good goal setting processes will link the individual salesperson’s and the firm’s goals. They will be based on a number of considera­tions, not solely on sales history. Most importantly, they will be realistic and obtainable.