Setting sales quotas is one of those rituals that company owners enjoy about as much as paying taxes. For some it's an annual event; for others, a quarterly exercise. Know this: Whether you have two reps or 200, the process is never completely scientific. It's partly a game of chance, more so now because of the sluggish economy. So how can you improve your odds of getting quotas right? We spoke with Michael Alter, president of SurePayroll, a payroll- services company based in Chicago (and an blogger), who has assigned hundreds of quotas over the years to more than 50 salespeople. He laid out the finer points of his 2010 sales-compensation strategy (which forecasts 30 percent sales growth) for writer Susan Greco.

How tough is it to set fair quotas?

For someone running a business, setting quotas is a challenge because you can never really win. If the goal is too easy, you pay more than you should. On the other side, if you set it too high, your sales reps don't make any money, and they'll leave. It's much harder to get a quota right in a sluggish economy, and much more dangerous if you get it wrong, If you pay too much, you'll be cutting into your cash flow. Since you can never win setting quotas, your first goal should be to try to minimize your downside, and set rules that drive the behavior of your sales reps to align with your larger goals.

So how do you set sales quotas?

At my company, there's no one formula. We look at past performance, the experience and skills of the reps, and the market. We put them all together. The quota has to be a number economically viable to us—I have to be smiling as I pay you. And everyone has a different quota here. I expect more from someone who's been here five years.  In a bad economy, even if you don't always make your quota, you can make more than a junior rep who does make quota. A rep who has been here for five years is more valuable to me by several orders of magnitude. Fair has many definitions—you want to set a comp plan that's fair for the company, yet respects the individual.

Just how challenging should a sales quota be?

I look at quota as what I'm paying you to do. Roughly 80 percent of reps should be able to make quota at any one time. If it's much higher, there's probably not enough of a stretch. But we're not looking to say, "By the end of the year, our bottom 20 percent of sales reps will be gone." It's not that rigid, and I find that the people who miss quota are not the same 20 percent every quarter. Part of how you set quotas is making room for some to miss it some of the time.

How does your sales force work?

We have about 35 reps selling payroll services directly to end customers. They sell primarily over the phone, and have leads generated for them. We have a couple of reps knocking on doors, developing partnerships with banks. And we have three reps selling add-on services, such as employee-background checks, to our existing payroll base. We pay the inside salespeople the same as the outside salespeople. Everyone has a small base salary, and everyone is commissioned and has quotas. Commission is based on revenue generated.

Do you ever tweak quotas to help struggling reps?

Once quotas are set for the quarter, we all live and die by them. We won't tweak them. But we design an incentive for the team to drive certain behaviors. For example, a double commission on background checks for one quarter. The old sales adage – tell me how they're paid and I'll tell you what they'll sell – is true.

How do you separate sales goals from sales forecasting?

Goals are from the top down: Here's your quota, now tell me what you're going to do. The forecast is from the bottom up and it's always changing. Quotas comes first.  I can get a reasonably good read on our total volume 90 days ahead. There's lot of seasonality in our industry, so it only makes sense that we change the quotas and incentives from quarter to quarter.

What's the biggest change you've made to the quota structure due to the economy?

Though the majority of our reps have a quarterly quota, we decided to switch our business development guys to an annual quota. We needed to make the change because the sales cycle is so long selling to banks, and it has grown longer by between 25 percent and 40 percent in recent years. They are paid to hunt and hunt for a long period of time.

Also, 18 months ago, we switched from straight revenue to revenue plus incentives for exceeding quota. The big change was making the bonus and kickers apply regardless of the size of your quota. Now, as soon as you exceed quota, you get a bonus based on the total of what you sold. The percentage bonus helped push newer reps along faster to that next tier, because there's real money there. My feeling is that if I set quotas at a level that's profitable for the company, it doesn't matter if I'm paying my reps more.

What issues did you weigh as you set your 2010 sales goals?

We don't have an annual president's club any more. It's just quarterly, but we might add that back in for reps who make quota all four quarters. We always debate whether to have a team incentive for everyone. Right now, only team captains get a team bonus.

If a company is forecasting flat sales because of the sluggish economy, it is really reasonable to expect salespeople to sell more?

You can still expect sales growth from salespeople. The question for a business owner is, if you are expecting flat or little growth, do you need as many sales reps? The same reps should be able to get more productive each year. Year One should be dramatically different compared with Year Five or Year Six.