When tariffs rise, prices follow—and if you’re not careful, so does your sales payroll.
That might not sound like a bad thing at first. But when commissions balloon due to inflation, not performance, it can throw off internal pay equity, strain your margins, and create a ripple of tension across your organization. We’ve seen it happen before, and if you’re relying heavily on commission-based pay, it’s time to get ahead of it—again.
Here’s how to rethink your sales comp strategy now, before tariffs and inflation throw your numbers out of whack.
The Inflation Domino Effect
Tariffs are designed to increase the cost of imported goods. What often gets overlooked is that domestic producers typically raise prices too—because they can. The result? Across-the-board inflation.
If you’re paying sales reps a commission on sales or gross margin, this kind of pricing inflation automatically increases their pay—regardless of how much actual new business they’ve earned.
In one real-life example, a sales rep earning $500K a few years ago jumped to $850K during an inflation spike. Same effort, same customers. Just higher prices—and bigger commissions.
Compensation Models: Commission vs. Goal-Based
Let’s quickly contrast the two main approaches to sales comp:
Commission-Based Pay
- Pros: Easy to administer, highly motivating for growth.
- Cons: Pay increases with price inflation, not performance. Harder to control or predict.
Goal/Bonus-Based Pay
- Pros: Easier to adjust. You can include inflation factors when setting sales targets.
- Cons: Requires more upfront planning and communication.
How to Fix Commission-Based Compensation Before It’s a Problem
If your organization relies heavily on commissions, the risk during inflationary periods is real. The good news? You’ve got tools.
The Two Levers of Adjustment
1. Lower the Commission Rate
This is the most straightforward option. If inflation has caused a 30% increase in prices, reducing your commission rate (say from 10% to 7%) can bring total pay back in line with historical norms.
Why it works:
- Simple math.
- Easy to explain in context of broader inflation.
Why it’s risky:
- Can damage morale.
- Reps may ask, “Will you raise it again if prices fall?” (Unlikely.)
- You can only reduce the rate so far—eventually you run out of runway.
2. Adjust the Basis of Commission
Instead of lowering the rate, change what the rate applies to. One effective strategy is to set a non-commissionable threshold—for example, pay commission only on sales above 70% of last year’s performance.
Why this works:
- Helps preserve commission rates.
- Protects against windfall earnings.
- Allows you introduce risk/reward dynamics. For example, above that threshold, you could even increase the rate to drive growth.
Bonus benefit: This method feels more performance-aligned and is easier to justify internally as “earned” incentive compensation, not automatic inflation bonuses.
Build an Internal Inflation Response Policy
One of the smartest ways to future-proof your sales comp plan—whether commission-based or bonus-based—is to formalize how you’ll respond to inflation before it hits.
Here’s how to build one:
1. Set a Trigger Threshold
Choose a measurable benchmark, like average unit cost of goods sold. For example:
“If our average unit cost increases more than 6% in a quarter, we activate the inflation adjustment policy.”
2. Apply a Formulaic Adjustment
Once the trigger is hit, use a formula to adjust sales goals or bonus targets. Continuing the above example:
“If cost increases by 10%, we adjust targets upward by the 4% difference above the 6% threshold.”
This approach avoids finger-pointing or reactive, mid-year goal changes. It’s objective, it’s math-based, and—most importantly—it’s fair.
3. Communicate the Policy Ahead of Time
Educate your sales team about this policy, how it works, and when it applies. Doing this before pricing changes hit the market ensure alignment and trust across your organization.
What About Inside Sales and Sales Structure Shifts?
Many companies are shifting maintenance of repeat business to inside sales, allowing outside reps to focus on new customer acquisition. That makes operational sense—but it also demands updates to compensation models.
- Inside sales reps often follow the same comp structure as outside reps, but with lower base pay and target bonuses.
- New business hunters may require higher premiums (temporarily) because their starting book of business is near zero.
Your sales comp structure should reflect these role differences—just make sure it’s intentional and well-communicated.
Final Thoughts: Plan, Don’t Panic
Tariffs, inflation, and pricing volatility are out of your control. But how you respond isn’t.
Here’s your to-do list:
- Audit your sales compensation structure.
- Model what happens if inflation pushes prices up 10–30%.
- Create a clear, formula-driven adjustment policy.
- Communicate it to your sales team before change hits.
The takeaway? If you build the right policies now, you’ll avoid having to scramble later. And your organization—and your team—will be stronger for it.
