Sales compensation costs are to grow 2 percent in 2018 maintaining modest cost level increases, according to the Alexander Group’s 2018 Sales Compensation Trends Survey©. Companies have budgeted these historically modest increase levels for the last five years. However, as workforce capacity is absorbed and full employment brings wage inflation pressures, sales compensation costs could increase.
*Source: The Alexander Group’s Sales Compensation Trends Surveys
Sales compensation plans produce varied earnings based on sales performance. Some sales personnel will exceed the target pay for exceeding target performance. Many will earn target pay for achieving target performance and others will underperform and receive less than the target pay amount. This distribution of performance and payouts is a normal outcome of individual sales performance. Many factors affect this outcome, but mostly sellers’ efforts drive these results. Setting aside producers who earn a percent of each transaction (e.g., real estate, financial advisors, traders and manufacturers reps), management establishes a target earnings amount for each sales job. The target earnings amount is comprised of two primary elements: base salary and target incentive amount. Sales management and finance fund annual increases to cover market-driven increases in labor costs. HR gathers compensation market pay level and trends data to inform management on the cost increase. Each year, management budgets this increased amount. In 2018, survey participants estimate 2 percent growth in target total compensation for the primary sales job. Looking back, the estimate for 2017 was also 2 percent and the actual outcome was 2 percent, a fortunate occurrence.
Most sales departments anticipate 5 percent growth in revenue for 2018. The sales force contributes to productivity improvement by achieving 5 percent revenue growth while only incurring a 2 percent increase in compensation costs. Each year, such a “gain” provides a “productivity lift.” Not all sales departments can make this contribution. In fast growing markets where headcount is expanding rapidly, sales costs could increase at a rate faster than revenue production. This is one of the anticipated investments that high-growth companies assume—hiring sellers prior to having revenue to fully support their loaded costs. However, more mature markets will often expect a productivity gain from the sales force by providing compensation funding increases at a lower rate than revenue growth.
Perfect Storm or Pot of Gold?
Now here’s the challenge: What if sales management gets it wrong? What if the sales volume growth estimate is too low? As sales management assigns quotas at the start of the fiscal year, the assumed (soon-to-be-proved-wrong) growth rate rolls through the quotas matching the too-low annual objective. Of course, the company is eager to celebrate the higher than anticipated revenue growth. But these outcomes can trigger unexpected sales compensation payouts far above the budgeted amount. Because of incentive accelerators paid above the target performance, the cost increases of the compensation program can far exceed the initial budget set at the start of the year. This results in a perfect storm for the company and a pot of gold for the sellers. Meanwhile, the opposite can occur when management overestimates the annual growth and assigns overly ambitious goals to the sales force. In such a case, nobody wins: The company does not hit its sales objectives, and sellers are paid less than target compensation levels.
Cost of Labor
The cost of labor—what to pay salespeople—is a market-informed decision. Revenue growth estimates establish sales quotas. Payout formula provides for performance-based earnings. Even in a perfect world, it’s hard to balance all these conditions for optimum outcomes.
Wage inflation is the function of both demand and availability of talent. Today, sales leaders believe they can find the sales talent they need without accelerating target earnings, thus keeping pay levels in line with modest labor market practices. Meanwhile, alternative sales channels, such as digital selling, telephone and e-commerce, will continue to modulate the absolute demand for sales talent. We can test this assumption of continuing modest wage increases with the arrival of a robust economy. Perhaps sales compensation wage inflation will increase…or, maybe not.