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Our benchmark research suggests some straightforward ways that companies can improve sales forecasting and demand planning. One is to offer incentives to improve accuracy of sales forecasts. Only one-third of companies participating in this research reported that they achieve better than 80 percent accuracy of their forecasts, which we assert is the minimum standard necessary to be effective in financial budgeting and operations planning. Only one-third of companies tie performance awards to sales forecast accuracy, but those that do achieve higher rates of accuracy than those that do not.

In setting objectives, it is important to eliminate biases that undermine accuracy. For example, since companies reward overachievement and punish shortfalls, it is tempting to set forecasts low. One way to avoid this is to institute a "closest to the pin" assessment method. That is, reward those who get nearest to the forecast number, regardless of whether the closest is higher or lower than expected. A complementary approach is to reward relative performance rather than fixed objectives. Why, for instance, should a sales force be rewarded for growing 15 percent after forecasting 10 percent if the market grew 20 percent? In fact, that sales force lost market share. Similarly, why should a sales force that produces 5 percent growth instead of the 10 percent projection be penalized if the market is flat?

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