Future-Proofing Sales Comp: Smarter Strategies for a Volatile Market
The ability to stay calm and take a levelheaded approach during times of volatility is a crucial survival skill for businesses, especially those in the industrial sector.
In an era of rising and unpredictable tariffs, you have one element you can control to rein in costs – sales compensation. If not carefully monitored and managed, sales compensations can quickly spiral out of control, compounding the challenges created by market volatility.
It’s simple cause and effect: if sales rep compensation is directly tied to sales commissions, rising prices due to tariffs will likely lead to inflated compensation — resulting in a skyrocketing sales payroll. This can lead to a range of negative outcomes, including pressure on your profit margins and internal tension as your compensation structure becomes unbalanced and misaligned with actual performance.
Manufacturing and distribution companies are particularly susceptible to the disruptions caused by tariffs, making it all the more important to take control where you can. That’s why it’s smart to proactively reevaluate your compensation strategy — keeping it fair, performance-based and aligned with your broader financial goals.
How Inflation Can Lead to Overblown Compensation
Tariffs are intended to increase the cost of imported goods, giving domestic products a competitive edge. However, domestic producers often respond by raising the price of their own goods as well. Historically, this has led to broad inflation, driving up prices across the board.
An expensive side effect is an automatic increase in pay for sales reps with commissions based on sales or gross margin. Their compensation will rise along with the rising inflation, regardless of whether they’re bringing in additional business.
In the Store: NAW’s 2024 Executive Compensation Study
Consider the case of a sales rep whose earnings jumped from $250K to $350K a few years ago — not because of any extra effort or new customer acquisitions, but simply because of a spike in inflation. Those inflated prices automatically triggered inflated commissions as well, creating dissension among company employees who didn’t receive such generous pay increases.
Reining in Runaway Commissions by Rethinking Compensation Models
There are two primary approaches for sales compensation, and which path you take can make all the difference during inflationary periods.
- Commission-based pay is easy to administer and easy to understand. It’s commonly adopted due its ability to drive sales growth. However, the downside is it’s more challenging to predict and manage, as pay increases with price inflation, regardless of performance.
- Goal or Bonus-based pay, by contrast, can be tricky to implement because it requires planning and clear communication. The advantage is that it allows you to factor in inflation when setting sales targets and has the flexibility to adjust your compensation structure as conditions change.
How to Get Ahead of the Upward Curve for Commissions
Fortunately, even if you’re reliant on a commission-based pay structure, you have two highly effective levers to adjust commissions as needed.
1. Reduce the Rate
This approach has the advantage because it’s straightforward. Suppose inflation has raised prices by 30%. If you respond by reducing your commission rate from, say, 10% to 7%, that can put your total payroll back in sync with past expectations.
The risk is that it can have a negative impact on morale. Sales reps might hold the expectation that you’ll raise the rate again if prices decrease, which is unlikely. And there’s a limit to how far you can take this — at a certain point you’ll hit a floor on how much you can lower the rate.
2. Redefine the Basis
A more effective approach may be to change which sales are eligible for commission. For instance, you could establish a non-commissionable threshold, only paying commission on sales that exceed, say, 70% of the previous year’s benchmark.
This strategy lets you maintain a motivating commission rate while preventing unearned windfalls. It also ties rewards more directly to actual performance. To further encourage growth, you may consider increasing the commission rate for sales that surpass your target threshold.
This approach may be the most straightforward to justify to your team, and most effective at keeping them motivated, since it’s clearly tied to performance.
Proactive Inflation-Response Policies Pay Off
Implementing a solid inflation-response policy helps to insulate against future volatility by ensuring your approach is established before it’s actually needed. These key pillars are required for a successful inflation-response policy:
A Clear Trigger for Activation: Start with a measurable benchmark that triggers the adjustment, such as an increase in the average cost per unit. As an example, you might specify that if the average unit cost of goods sold goes up by more than 6% in any given quarter, the inflation adjustment policy kicks in.
An Objective Formula for Adjustment: Next, establish a clear-cut formula for how sales goals or bonus targets will adjust when a trigger is activated. For example, if costs rise by 10% and your threshold is 6%, targets increase by the 4% difference. This approach ensures adjustments are based on objective metrics and predefined rules and changes don’t feel arbitrary or unfair.
Communication in Advance
For this approach to be effective, your team must be well educated about the policy and how it will be implemented. Creating buy-in well ahead of pricing changes fosters trust and ensures that no one is caught off guard when adjustments kick in.
MDM Case Study: MSC Industrial Supply (Premium access here)
Design Your Plan to Address Changing Roles
It’s increasingly common for businesses to place the inside sales team in charge of repeat business, freeing up outside sales reps to put their energies into finding new business and expanding the customer base.
If that’s the case for your company, you’ll want your compensation models to reflect those shifting roles. For example:
- Outside reps who are pursuing new customers may need higher premiums at the beginning of their tenure, because they’re building from scratch.
- Inside sales reps, on the other hand, can follow the same basic comp structure as outside reps, but with lower base pay and target bonuses since they’ve got a stable of established customers to work with.
Action Items: Four Steps to Fortify Your Sales Comp Plan
There are four basic steps to prepare your business with a compensation structure that can flex to adapt to the changes.
- Review. Do a thorough audit of your current compensation structure.
- Consider. Model contingencies to see how inflation spikes will affect your business and compensation. What happens if prices go up 10, 20%, or 30%?
- Plan. Lay out a clear and objective adjustment policy to respond to the scenarios above. Base it on a formula your team can understand in advance.
- Communicate. Discuss with your team, answer questions, and clarify as needed so your team is on the same page.
Tariffs and inflation create unpredictability — but they don’t have to cause instability. With well-considered policies in place, your organization has the agility to weather what’s ahead.
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