Will Tariffs Crush Your Sales Quotas? Be Prepared with Comp Solutions

Do trade tariffs pose a threat to your organization’s sales quotas?

Sales compensation plans rely on sales quotas to determine incentive earnings. Some sales incentive plans tie payouts to the percentage of quota achieved. Many plans provide higher incentive payout rates when the seller exceeds their quota.

But, what if tariffs changed your sales revenue results, either down or up? Your sales compensation plan might not function as expected. Payouts could decline or balloon unintentionally. When is quota intervention necessary and what are potential solutions?

This article aims to provide some insights on the subject.

Annual Sales Quota Assignments

Sales quotas predict the future. Each fiscal year, the sales department receives its dollar objective from finance. Sales management allocates this objective to sales personnel. Managers use various quota allocation techniques (e.g., algorithms, account plans, seller estimates, sometimes an Excel dartboard) to accomplish this task. The purpose is to fully allocate the sales objective to sellers. The uncomfortable outcome? In general, no one is happy.

Sales managers struggle to get quota setting right. Questions abound:

Is the number from the finance department reasonable?
Will historic purchase volumes continue?
Is growth potential by territory realistic?
Are product managers’ estimates of new product sales volume accurate?

And, sellers fret, asking:

Is my manager treating me fairly?
Is the supporting data accurate?
Am I getting a reasonable quota?

After numerous rounds of adjustments with their manager, sellers eventually “accept” their assigned quota. Sellers know an incorrect quota can inflate earnings or suppress them. Uncertainty is sufferable and predicting the future is tough.

Producers Versus Sales Representatives

Let’s focus now on sales representatives. They have target total compensation divided into base pay and incentives. Reps execute the organization’s strategic sales objectives. Management ties target compensation to labor market rates. Producers have a “book of business,” an industry commission rate and fully variable earnings. Pay for manufacturers reps, real estate advisors, financial advisors, insurance agents and mortgage origination sellers all move with the market. When disruptions occur, no adjustments are made.

Fragile Sales Quotas

Sales quotas are fragile. Once in place, various midyear disruptions can undermine the assigned sales quotas, making them less relevant to current sales realities and negating their integrity. Disruptions at various levels can include:

Territory level. Accounts can go out of business or be bought by a non-customer competitor.
Company level. Strategies toward sales volume, pricing, profit, product and account objectives can change midyear.
Industry level. Competitor actions, government regulations and technology advancements can upend the predicted quotas.
National level. A surging economy or an encroaching recession can negate the assigned quotas’ accuracy.

Some abrupt midyear shocks arrive without warning. Examples over the past few decades include the dot.com bust, 9/11, the housing market collapse, the COVID-19 pandemic and the artificial intelligence (AI) revolution. Trade tariffs now can be added into this category.

It’s almost impossible to predict the duration and impact of trade tariffs. Are they temporary or permanent? Will they boost short-term sales and/or sink long-term opportunities? Will they lift some industries and/or crush others?

An Arsenal of Solutions

So, how do you proceed this time around? Look back on recent history. What did your organization do during the pandemic? Did you:

Change quotas?
Change the formula?
Provide guarantees?
Do nothing?

Consider the following solution options if tariffs roll across your sales landscape. These suggestions address the challenges of companies facing a sales shortfall. For those seeing a sales bump with higher incentive payouts, a suggestion may be to let it flow to the sellers.

Option 1: Wait and See

Some may call this a smart move since “we don’t know what we don’t know.” It could be best to take a cautious approach to making any sales compensation plan changes. In fact, a certain degree of “tolerance” may best serve your program and the sales force. Doing something later is, perhaps, better than trying to fix an early mistake.

Option 2: Calibrate By Impact

Impact counts. For many employers and their sales organizations, that’s what happened during the pandemic. The more severe the sales impact, and thus sales quotas, the more pronounced the exercised intervention.

0% to 10% sales decline: Consider doing nothing. Sales departments are typically resilient. Salespeople are accustomed to selling’s ups and downs. Sales leadership will focus on recovering sales shortfalls.
11% to 25% sales decline: Consider providing a guarantee. Let the pay plan operate. If some sellers overperform, allow the incentive plan to make these payouts. For those falling short of quota, provide a guarantee (a percentage of target incentive) ensuring sellers earn at least 85% of their target incentive. For an optional action, consider increasing incentive rates for over-target performance.
26% to 40% sales decline: Consider resetting the quotas. Here, current quotas are no longer relevant. Reset them to reflect the market’s new realities. Close out the current quota period and make payments. Reset on a proportional year basis.
Greater than 40% sales decline: Consider terminating the current comp plan. Under these conditions, sales management should assess the sales function’s overall cost (including staffing levels). Provide pay guarantees. For an optional action, consider allocating the target incentive budget based on the sellers’ rank-order performance.
“Disparate impact” sales decline: Consider chartering a quota review board. The impact on sellers might be varied, with some seeing gains and others incurring losses. Appoint a review board to examine the impact on individuals. Develop guidelines to adjust existing quotas, provide individual guarantees and decline special treatment to those only facing minimal impact on sales opportunities.

Annual Quota: Backup Solutions

What if your ability to set accurate annual quotas is unsuccessful? No matter the investment, for various reasons, your annual sales quotas are more wrong than right. Here are some backup solutions:

Shorten the quota period. Instead of trying to set annual quotas, move to semiannual or quarterly quotas.
Use rolling average. Setting the fourth month quota on the previous three months of performance may provide real-time calibration.
Don’t use quotas. Provide a flat-rate commission with no accelerators. This approach provides the lowest risk.
Tie payouts to corporate bonus. When all else fails, put sellers on the corporate bonus program.

Additionally, use these work-around solutions to offset known problems:

New products. Leave unassured new products out of the annual quota. Use an incentive contest to launch the new product.
Unpredictable mega-orders. Use a mega-order policy to credit a portion of the mega-order to the quota. For the remaining order portion, apply a flat (reduced) commission rate.
Strategic account performance. Quotas often prove unworkable for strategic account managers. Instead, use a documented account plan to measure deal progression.
Quota reset policy. Publish a policy defining when and how sales management will reset inaccurate quotas. Define “inaccurate” as a percentage of under- or over-quota performance that triggers the reset.

A Dose of Prevention …

It’s hard to predict the future. Sales quotas are fragile. Unexpected disruptions do occur.

Will trade tariffs crush sales quotas? Maybe, maybe not. Your job, though, is to be prepared with solutions in case they cause unexpected sales results.

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