If scarce talent and supply chain constraints weren’t enough to keep members of the C-Suite up at night, they can now add inflation and the looming threat of a recession into the mix.
Nearly two-thirds of CEOs consider price inflation a long-term issue according to the 2022 Gartner CEO and Business Executive Survey. And of course CFOs, with primary responsibility for managing macroeconomic risk, are factoring inflation risk into their annual planning more than they would most years.
But it’s a measure of how serious the inflation threat has grown that CSOs are beginning to ask about their own obligations and options. Many report a growing customer reluctance to finalize purchase decisions and an aversion to big, risky purchases under the current economic circumstances. This is slowing deal cycle times and even stalling opportunities altogether. But unlike past slow-downs, these challenges are playing out today under the looming threat of inflation.
That means that many CSOs are now in the unenviable position of having to grow the top line while controlling costs, yet still keep the sales force motivated – all in a world where inflation is making prices and costs highly unpredictable.
Survey data confirms how important this issue has become: In an August 2022 poll of 74 sales and business leaders, 36% reported that meeting quotas is what worries them the most about an economic downturn. The question that naturally follows is whether to adjust sales quotas (and crediting) in the face of inflation.
Unfortunately, few sales leaders have personal career experience with inflation that is comparable to the current macroeconomic context. Inflation can certainly wreak havoc on many aspects of a carefully designed sales incentive program, but its direct and indirect effects are not necessarily obvious. To decide how to respond to inflation, CSOs must first understand how inflation can undermine quotas.
How Inflation Affects Sales Quotas
CSOs who have already been pulled into the inflation mitigation process in their sales organizations are wisely gravitating toward a cautious approach in general. But CSOs who are still deciding what action (if any) to take must proceed with caution: Inflation’s effects on quotas is particularly tricky to predict, because it can both increase and decrease results, sometimes simultaneously.
On one hand, rising prices can inflate quota attainment. When input costs (for raw materials and employee labor) rise, companies seek to raise customer prices to protect profit margins. But if customers pay higher prices than what was assumed during quota-setting, sellers’ attainment results can be inflated, muddying the interpretation of quota attainment results. This risk increases the more a company’s sales fall in the later part of their fiscal year. Sellers who realize this might even delay deals, hoping to pick up a few points of attainment from rising prices.
On the other hand, rising prices have the potential to suppress customer demand. Even as it is driving up quota attainment through its effects on price, it can also have the opposite effect by reducing the number of deals that actually close. In an inflationary environment, customers may adopt a more conservative approach to spending, leading to longer sales cycles and lower absolute (constant price) sales.
What Sales Leaders Do About Quotas in Response to Inflation Risk
Only one in three companies has firm plans to adjust compensation in response to inflation, according to Gartner research. Almost 40% of companies are still undecided on whether to make inflation-based changes. Compensation change is hard under the best of circumstances and this holding pattern in the data is a reminder of the extra attention and deliberation needed. But that doesn’t mean there are no immediate steps to take.
Above all, CSOs should avoid making reactive, short-sighted decisions about inflation risk, by considering any sales actions, short or long term, only within a wider cross-functional response. If communication channels with the CFO need attention, now is time to fix them; ongoing, structured dialog with other C-suite leaders can ensure that any steps sales takes are in harmony with other parts of the company.
Moreover, transparent communication with salespeople can be just as important as the cross-functional planning that happens behind the scenes. Whether the C-suite plan calls for immediate action or more waiting, sellers’ questions about inflation should be acknowledged and addressed before they become distractions. If sellers hear nothing from leadership, their questions can grow into concerns, which can begin to shape their behavior, sap their motivation and ultimately drive up turnover.
CSOs should look for opportunities to clarify common misunderstandings about inflation and quotas and offer accurate facts instead. For example, not all sellers will appreciate that inflation often affects prices in quite narrow patterns. Sellers who see the price of products in their bag rise will feel reassured about the value of their own compensation if they understand that inflation doesn’t affect everything uniformly.
If and when the time comes for CSOs to address inflation risk by adjusting quotas, they should avoid a one-size-fits-all approach. Rather, they should evaluate each sales forecast input separately and isolate the unique drivers of uncertainty. They can then deploy targeted compensation plan mechanisms to neutralize those specific areas as surgically as possible.
Along the same lines, CSOs can also limit the unintended effects of quota adjustments by limiting adjustments to markets with the highest inflation risk, products whose prices are most vulnerable to rising input costs and customers who are least sensitive to price increases.
And last but not least, sales leaders can increase sellers’ confidence in the company’s overall handling of inflation by providing them with selling aids and enablement tools to manage their customers’ concerns about price increases or inflation more generally.
Inflation’s broad and unpredictable impact requires close coordination with finance and other functions to avoid unintended consequences, so it’s crucial that CSOs approach this challenge only in close coordination with the company’s broader response.