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CompensationMaster Newsletter Article, March 2002 When was the last time you adjusted your compensation plans for
inflation?
Does that sound like a crazy question given today's economy?
It's not. Adjusting your compensation plans each year to match inflation is one
of the best practices we recommend.
Many companies set up a compensation plan and then leave it
alone for years - we've seen companies that haven't changed their plans in 15
or 20 years!
Yet each year the cost of doing business increases. The sales
price of your products and services typically rises too. But that's not enough
to protect you.
What can happen, particularly in commission-driven industries
like real estate, is that the higher sales price allows your sales force to
reach higher commission levels faster.
At those levels, you pay them a higher percentage of each sale,
which means you have less money available to cover corporate expenses.
Meanwhile, those expenses are increasing.
It doesn't take long for those plans to become outdated, so
they no longer recover the company's expenses and the profit margin erodes.
Once this occurs, it's hard to get the money back.
You have to make such a large adjustment that it can't be done
all at once - you risk losing too many members of your sales force. So you
implement the change over two or three years, and by then you're behind again.
Meanwhile, you're leaving the door open for a competitor to
introduce more aggressive styles of compensation and steal away your top
people.
The best approach is to revisit your compensation plans every
year, using the Consumer Price Index (CPI) to adjust for inflation. You can
find the CPI at http://www.bls.gov/cpi/.
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