The incentive to forecast accurately is a natural misalignment between sales management and the sales team. Sales managers need to exceed their goals and require an accurate, high-level view of sales performance for the quarter across the entire team to identify deficiencies and react early. On the opposite end of the spectrum, sales reps lean toward over-optimism and want to keep their manager off their back. The result is an inflated sales pipeline and missed goals. This problem can be remedied by collaboratively building a team-wide pipeline grading system and by providing a financial incentive for accurate forecasts.
The first step is to gain “buy-in” from the team on a standardized pipeline grading system. The grading system consists of two parts: standard percentages by pipeline stage and probability adjustments based on typical customer situations. The sales manager should establish the standard percentages by pipeline stage using historical information. If historical data is unavailable, estimates can be assigned to each stage and refined over time.
Once the standardized percentages are selected, the sales manager should set up a team meeting to review the standardized percentages and ask the sales team to come up with a menu of probability adjustments by stage. For example, the team may bring up that larger companies with more stakeholders in the contract negotiation process have a lower probability of close. The sales manager should help the team consolidate and quantify their feedback into a menu of adjustments. Here is an example based on a simple four-stage sales pipeline (Interest, Qualified, Proposed, and In Contracts):
After the initial brainstorm (or two), the sales manager should present the final pipeline grading system in a team meeting and ask that each rep use it moving forward. Managers should also set up a systematic review process to revise the system. Now, the sales team owns the grading system, and they feel responsible for its accuracy and implementation.
Aside from establishing “buy-in” from the team, building a team-wide pipeline grading system has additional impacts. For one, it helps eliminate each rep’s personal bias when grading their deals. Secondly, it captures more information about prospective customers in the pipeline, avoiding repeat discussions about unique customer situations and close likelihood during weekly 1:1s and team meetings.
Now that the grading system is established, the second step toward improving forecasting accuracy is to provide reps with a financial incentive. Rather than discuss how to compensate a sales team in detail, I want to plant the seed and encourage sales managers to come up with their unique strategy to integrate forecast accuracy into their compensation plans. For example, a sales manager might establish that on the 15th day of the first month of the quarter, each sales rep must provide their end of quarter sales forecast for their book of business, and any representatives within 80% of this number receive an incremental bonus. There is no “one size fits all” approach to including accuracy within a sales compensation plan, and the important thing is that it’s included.
By correcting the age-old forecasting incentive misalignment between sales management and sellers, companies can improve their long term revenue generation and reduce friction within the team. Sales reps will identify pipeline shortfalls earlier in the quarter and feel rewarded for entering accurate data into the team’s CRM. Sales managers will have better visibility into pipeline deficiencies and be able to react earlier in the quarter to remedy. By aligning the incentives across the team for accurate forecasts, everyone wins!