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2023 Salary Increase Budgets

As budgeting for 2023 quickly approaches, compensation and human resource professionals must narrow in on their salary increase strategies for the coming year. Labor market conditions this year, including historic high inflation and unprecedented turnover, have had a dizzying impact on the cost of labor. Looking ahead to 2023, the threat of recession now looms. Projecting salary increase budgets for next year may seem like a daunting task, but an approach that rests on systematically analyzing what you know can help inform your talent strategies at a juncture point in the market. 

Determining Your Salary Increase Budget 

We believe that a process such as the following will aid your decision making. First, review compensation strategy competitive targets, based on geography, industry, business unit, function, and employees thought as in high demand and high potential positions. Second, assess current level of competitiveness for each group, including recently published spot surveys. Third, take the temperature of employees regarding pay, including competitiveness, internal equity, and their priorities. 

Next, consult with business leaders and finance sharing information gathered so far and gain their assessment of current and anticipated business conditions, sketching out salary increase alternatives. Finally, develop a salary increase plan, including incentive and bonus alternatives that don’t increase longer-term fixed costs while maintaining total competitiveness, and low-cost employee-paid benefits that are attractive to employees. 

One final thought. Keep in mind that employers have historically lagged salary increases during high inflation times, catching up over one to three years. It happened in the 1980s and after the financial crisis earlier this century. Lastly, each organization is likely to form its own unique solution with alternative plans should company circumstances change.

2023 Salary Increase Survey Projections 

Following are salary increase projection results provided by participants for several recently published compensation surveys. We suggest a note of caution, however, in interpreting results. Often it is necessary to dig into the reported projections to better understand the content of the numbers. 

For instance, all projections include general/COLA and merit increases. Some survey participants, though, may also include promotion increases and sign-on, retention, and referral bonuses in their 

submissions, while others don’t. 

The WorldatWork Salary Budget Survey 2022-2023 reported 2023 mean salary increase budgets of 4.1%, including general/COLA of 2.3%, merit 3.6%, and other 1.2%. Both nonexempt hourly nonunion and salaried are projected at 4.1%, while exempt salaried at 4.2%, and officer/executive was 4.1%. Salary structures are expected to increase 2.7%. 

The percentage of participants using variable pay is to stay constant at 85%, while budgeting for 2023 is down from 2022 actual. Mean budgeting as percentage of payroll for nonexempt hourly nonunion is projected at 5.6% versus 6.4% paid in 2022, 6.5% for nonexempt salaried versus 7.3%, 13.3% for exempt salaried versus 14.3%, and 38.3% for executive/officer versus 42.7%. 

Salary.com’s 2022-2023 Salary Increase Survey reported that 2023 salaries will increase 4.0% across all employee categories. Forty-eight percent of survey participants are planning year-over-year salary increases. 

Respondents to Payscale’s 2022-2023 Salary Increase Survey report an average national planned base salary increase of 3.8% in 2023 up from 3.6% in 2022. Exactly half expect to increase their budgets for 2023 in response to competition for talent. Note planned increases in the Payscale survey include general/COLA, merit, and other increases. 

Base salary increases in manufacturing, retail, energy & utilities are expected to be 3.8% to slightly higher, while technology (includes software), finance & insurance, and nonprofit will be in the 4.0% to 4.2% range. Engineering & science are reported the highest at 4.6%. Companies with less than 100 employees report anticipated increases of 3.6% while organizations with between 100 and 5,000 employees report planned increases of 3.9% to 4.1%. Further, Midwest states of Illinois, Indiana, Iowa, Minnesota, Ohio, and Wisconsin report slightly higher anticipated increases of 3.8% to 3.9%.

Twenty-five percent of participants report they budget separately for promotions. Of those, promotion increases are budgeted at 1.8% of payroll for 2023, up from 1.7% in 2022. 

Willis Towers Watson reports 2023 overall salary increase budgets of 4.1% versus 4.0% actual in 2022. Sixty-four percent of recent survey participants are planning higher budgets for 2023. 

The Economic Research Institute (ERI) recently updated its National Compensation Forecast for 2023. ERI projects salary increase budgets of 3.78%. Based on its analysis of economic trends, it believes its projections will continue to increase as 2023 comes closer. It further projects salary structure movement to be 2.98%. 

Carlson Dettmann, a Cottingham & Butler Company, recently released the results of its Annual Wage Increase 2022/2023 Survey. In the survey, largely of upper Midwest organizations, participants of private companies projected 2023 budget increases of 4.0% for salaried employees and 3.8% for nonexempt. Additionally, respondents of public organizations projected increases of 3.5% for both salaried and nonexempt employees. 

Contact Us 

Determining 2023 compensation expenditures is a trade-off between employee expectations feeling the effects of inflation and their employer’s success over the past several years and companies’ reluctance to remain competitive in uncertain times and to add to fixed costs. Each organization is likely to form its own unique solution. Feel free to contact Neil Lappley at nlappley@lappley.com or (847) 921-2812 to discuss your company’s approach.

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Sales Compensation Review Time

With fall on the horizon, it is time to think about your company’s sales compensation plans for 2021. This will likely prove to be a more challenging prospect than past years due to the historical events of 2020.

Indeed, the Conference Board has estimated that Gross Domestic Product will contract by 7% for the full year 2020. And according to the WorldatWork’s 2020 Sales Compensation Programs & Practices Report, only 30% of participating businesses say that half of their organization’s sales teams will hit quota in 2020.

Photo courtesy of Pixabay

Most of us recognize that the nation’s economic woes will not go away easily or quickly and that we are living with a much higher degree of uncertainty and risk. In this environment, your sales compensation planning requires thoughtful consideration to motivate and retain your top salespeople. Here are several important steps you can take:

1) Establish a Sales Incentive Design Team

Include representatives from sales management, marketing, finance, and human resources. All members have significant interests in a successful sales organization. Sales management is, of course, responsible for implementing the program and reporting back on what they learn in the field. Marketing brings the linkage between corporate strategy and sales strategy.

Finance is concerned about the cost of sales compensation and return on investment, calculating as a percentage of revenue over time. The finance department also will evaluate the numbers of sales personnel related to quota attainment. Human resources will contribute to the design of the plans reward system so that the sales positions are motivated. They will also want to match hiring with role requirements.

2) Align Sales Incentives with the Company’s Business Strategy

Your sales compensation plan does not exist in a vacuum. It needs to be closely aligned with an organization’s business and marketing strategies and goals. Also, the plan must address both internal and external forces impacting the sales job and selling practices.

3) Calibrate the Plans to the Various Sales Roles

A common practice for many companies is to set the same percentage of base salary as the target performance for all jobs involved in the sales process. This is a mistake.

Instead, carefully analyze the role each sales position has in the overall sales process. Both impact and influence on the final customer decision must be considered. This analysis then becomes the input to determining the right pay mix for each job.

Photo courtesy of Pixabay

4) De-Risk Plan Design

In a high-risk business climate, it makes sense to reduce the risk and leverage in incentives. This means less upside and downside and less incremental payout per unit of incremental performance. You can achieve this by implementing:

  • Flatter payout curves, and
  • Lower maximum and minimum payouts. For example, adjust target payout ranges of between 50% and 200% to between 25% and 150%.

5) Set Fewer Goals

The WorldatWork’s Compensation survey finds that organizations are simplifying their incentive plans. On average, organizations are using up to three performance measures. Those using just one performance measure increased by 71%. Other strategic performance metrics are also more in play, such as penetration of existing accounts, acquisition of new accounts, and building account relationships. Since the pandemic has made customer relationships more complex, the need for more frequent communication and feedback with customers is more important than ever before.

6) Automate Sales Compensation Processes

A surprising number of organizations still manually conduct Sales Performance Management (SPM), 32% according to the WorldatWork survey. Of course, the use of third-party SPM greatly enhances accuracy and is time saving. In addition, using third-party Customer Relationship Management (CRM) helps you to organize sales activities and communicate more easily with your sales team, a practice employed by 45% of survey respondents.

Sales Management in Tough Times

In today’s challenging economic environment, sales managers who help their teams develop alternative ways to approach and build relationships with their customers and prospects will be more successful. Invest in training and mentoring programs to develop leadership skills, behavioral competencies, and organizational awareness.

About Lappley & Associates

Lappley & Associates is a management consulting firm advising manufacturers, service companies, utilities and non-profits about how to get the maximum return from their compensation programs and deliver on their organizations’ strategic vision.

Services include: Reward Strategy Development; Executive Compensation; Incentive Compensation; Salesforce Compensation; Base Salary Structures; and Market Pricing.

Contact Us

To discuss your sales compensation concerns, contact Tim Weizer at tjweizer@gmail.com or (312) 479-6411 or Neil Lappley at nlappley@lappley.com or (847) 921-2812.

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Salesforce Motivation: Act Now

Chances are when companies large and small developed their salesforce incentive plans for 2020, in no way did they envision the unprecedented challenges to come with the global COVID-19 pandemic.

In the current climate, salespeople — many who rely on variable pay programs tied to once more attainable business goals — may be filled with anxiety about their ability to meet or exceed benchmarks. Their total annual income could suffer as prospects for a solid financial future become less certain.

Photo courtesy of Pixabay

From the customers’ point of view, they may not need what your salespeople are selling right now. But they will when the economy rebounds. Nurturing and retaining the trust of loyal customers becomes job number one for salespeople in this scenario, but that approach may be counter to the design of a variable pay program.

The economic impact of the coronavirus has been swift and deep, so adapting your salesforce incentive plans for the remainder of the calendar year is advisable. In cases where the current performance level is less than 25% of the target performance level, it is imperative. Here are some reasonable approaches to consider so that your company is in the best position when the recovery comes:

Actionable Options

Since there is not a one-size-fits-all recommendation that will work for every organization, it is important to consider a variety of approaches, then weigh the pros and cons for each strategy.

1) Straight commission: based solely on sales achieved.

This pay-for-performance approach may look attractive on paper, but even in a robust economy only about 20% of businesses are using a straight commission plan. A draw against commissions is part of this option.

PROS

  • Easy for management to set the commission rate and execute.
  • Simple for salespeople to calculate if the plan is communicated well.
  • Acceptable to Finance Department as clear “pay for performance.”

CONS

  • Research shows that older salespeople want income stability versus a high-income opportunity. Younger salespeople tend to be more risk taking. Depending on the age profile of your sales team, it may be difficult to find the right balance.
  • May improperly promote the message SELL ANYTHING versus what the customer really needs. Not only does this potentially damage the customer relationship, it also hinders management’s desire to upsell premium products.
  • Can create increased anxiety among the salesforce while motivation decreases.

2) Adjusted straight salary.

This option replaces bonus/incentive payouts with a temporary base salary increase of 12-15%. Companies need to rethink the overall sales goal and recalibrate individual sales goals.

Photo courtesy Pixabay

PROS

  • Provides income stability in these uncertain times.
  • Adjustment percentage is a function of current bonus/inceptive plan specifics.
  • Once established, the plan is easy to administer.

CONS

  • Removes motivation among salespeople to meet or exceed sales goals.
  • Could have a ripple effect across other management groups or sales teams who may seek a similar arrangement.
  • May be hard to return to the old incentive plan once the sales period ends.

3) Guaranteed threshold income.

Each salesperson is guaranteed the threshold incentive dollars for the time period. The incentive or bonus plan stays in place as is so that any incentive earned above the threshold level would be paid out.

PROS

  • Maintains motivation of sales force while achieving income stability.
  • Easy to administer and communicate.
  • Can be extended into the next calendar year with ease, if warranted.

CONS

  • Not every culture will embrace the idea of guaranteed incentive income for all salespeople.
  • Guaranteed income may be unacceptable for companies facing insolvency or bankruptcy.

4) Guaranteed threshold income plus innovation bonus.

This option guarantees incentives at the threshold level and offers incentives for those creating new revenue streams.

PROS

  • Taps into the creativity of your employees to generate new ideas for growth and reasonable cost reduction.
  • Aligns everyone with the company vision, mission and values in a way that promotes “we’re all in this together.”
  • Gives salesforce a reason to seek input/feedback from customers on how they can better serve their needs.

CONS

  • Often difficult to judge the value of new ideas or to quickly implement.
  • Any bonus would need to be significant and reward employees for their entrepreneurial spirit.
  • Could be demoralizing for some companies or lead to confusion if no ideas are implemented or if the execution is botched.

5) Index performance: resets incentive performance target and payout.

In this scenario, the company shifts the incentive performance/incentive payout to reflect the median current performance level while maintaining the performance distribution. The current median performance result becomes the target/100% performance result.

Photo courtesy Pixabay

PROS

  • Provides a tailored approach for the entire salesforce or to each company division.
  • Easy to implement and execute with the proper communication and documentation.
  • Appealing to top performers, unless management limits the upside of incentive earnings payout or makes major downward earnings adjustment at year’s end.

CONS

  • May create uncertainty around benchmarks and indexes for next year if sales come back stronger than expected.
  • Incentive payout winners may feel they have nowhere to go but down in 2021, so they seek employment elsewhere.

Summary

Unlike other business downturns, this one has no precedent. This makes developing a plan for recovery that leverages the talents of your salesforce and keeps them motivated more important than ever. After all, the prospect of rebuilding your sales team from scratch after the worst is over may leave you further behind the eight ball.
Don’t wait. Act now. Your salesforce and your customers will thank you.

Contact Us

If you have questions about this or another salesforce compensation topic, please contact Tim Weizer at (614) 500-0509 or timweizer@msn.com. You can reach Neil Lappley at (847) 921-2812 or nlappley@lappley.com. In addition, please share or pass this article along to anyone you think may find it of interest.

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[Salesforce Alert Dec. 2018] Selling the New Salesforce Incentive Plan & Effectively Communicating It

The year 2018 has been one of major volatility in many markets creating widespread uncertainty. In this environment, it is understandable that companies are evaluating the impact market volatility may have on their salesforce incentive plans for 2019.

Fortunately, mindful planning and clear communication about your salesforce incentive plan can accelerate growth even in an uncertain economy. But first, two important next steps are to sell this new plan to the C-Suite and effectively communicate the new plan to the salesforce. Getting these steps right creates a double win. Salespeople win because appropriate rewards are available to them, while the company wins with a more motivated sales team aligned with the company’s goals.

Here are four recommendations supporting a win-win outcome by gaining approval of your salesforce incentive plan with the C-Suite:

1) Provide a Clear and Crisp Upfront Summary. Make the first page of your summary a topline summary. Start with the reason for change, a brief description of the approach used in analyzing the current plan, the primary plan changes being suggested, and the results of the new plan’s simulations. Then end with the benefits of the new plan (for example, better alignment with the company’s business strategy or more focused emphasis on margin enhancement).

2) Present the Rationale for the Recommended Plan and Tailor It to Your Audience. Visual perception research suggests that presenting a picture can often be more persuasive, engaging and powerful than text and speech alone. You can think of using a visual, for example, to demonstrate the extensive analysis done on the current plan.

Also, consider using a well-constructed table with numbers to let the C-Suite see for themselves the point you are making.

3) Strive for Clarity and Transparency. Sufficient time should be spent to ensure each page of the presentation is crisply worded and each chart can be clearly understood. Without this, the credibility of the speaker and the recommendations will both suffer.

4) Tell Them Again What You Told Them. At the end of the presentation, share an executive summary to refresh everyone on the main takeaway points. Then ask for agreement. Be prepared and open to engaging your audience in discussing your recommendations, alternatives you reviewed, or objections that may arise.

After securing approval for changes to next year’s salesforce incentive program, it’s time to move to the task of communicating the plan to your salesforce.

Here are three recommendations to get your salesforce on board with the incentive plan:

1) Provide a Clear Summary Incentive Plan Description. Including these elements in the description will promote understanding.

  • State briefly the business reasons why the incentive plan has changed.
  • State the incentive plan components along with a clear description of each. 
  • Show an example of how the new incentive plan payout at target compares to the old plan by using an example of “Salesperson X average performer”.
  • State the process that will be used, and by whom, to address any issues.

You may want to consider adding a frequently asked questions (FAQ) section at the end of the written plan description.

2) Create a Short Video to Support the Plan’s Introduction. With the increasing popularity of online videos and the shrinking of attention spans, an engaging two or three minute video can deliver the elements of your incentive plan in a compelling way.

For example, in the video the company’s president could briefly state why the plan has changed, while the vice president of sales could highlight the new plan’s components and how they align with the company’s strategy. A sales administration manager could then state the target earnings opportunity and payout frequency and refer the viewer to the summary plan description for further details.

3) Anticipate Resistance and be Prepared to Counter Challenges. Our experience shows that it is very likely that an individual or a group will resist the proposed changes to your sales incentive plan. For example, a star salesperson may see the need for plan adjustments, yet still feel anxiety about the changes. Anticipate resistance and be proactive. In this case, meeting in advance with your star salesperson may offset objections during your official presentation.

Contact Us
To learn more or discuss your sales compensation concerns, please contact Tim Weizer at tjweizer@gmail.com (phone 312-479-6411) or Neil Lappley at nlappley@lappley.com.

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[Salesforce Alert Sept. 2018] The Millennial Effect on Sales Compensation

A lot has been written about the interests, attitudes, and behaviors of Millennials (those born between 1981 and 1996). Among the facts that have been reported, primarily by the Gallup organization, these stand out:

  • Millennials will account for 50 percent of the US workforce by the year 2020.
  • Only 50 percent plan to be with their current company one year from now.
  • Only 29 percent are engaged at work.
  • At the 2016 Sales Compensation Conference, research done by Michael Ahearne, a professor at the University of Houston, suggests that Millennial salespeople are more interested in a leveraged compensation plan than their traditional peers

Based on our research and experience, we believe the following should guide the treatment of Millennials:

  • Millennials want to grow in a job that fits them.
  • They enjoy more periodic feedback than other generations.
  • They have a firm desire to be considered for a “fast track” promotion if their performance warrants.
  • Millennial salespeople want to be rewarded for their results.

All of this signals the importance of rethinking how to recognize and reward superior performance of an increasing population of Millennials in the sales organization.

So, what are some of the ways to consider?

Possible Approaches

Following are four possible approaches. Understandably, careful analysis will need to be undertaken to ensure any new approach or program can be aligned with a company’s overall culture and reward strategies.

  1. Career Pathing. To better retain Millennials offer individual career growth paths that spell out how a salesperson of any age can advance in the organization. According to reports, Credit Suisse, the international financial services company, did just that and believes that its 1% increase in retention can save $75 to $100 million a year.
  2. Outstanding Achievement Award. For all salespeople who clearly demonstrate stellar achievement, for example candidates for “The President’s Club”, offer them a new, end-of-year special bonus that can be used to support their outside-work deep interest. Examples could be a local community group (Boys & Girls Club) or the local alumni chapter of the college they attended.
  3. Enhanced Engagement Opportunities. To better engage Millennial salespeople, offer all employees some new or enhanced opportunities to participate with company executives. One example is providing structured networking with senior company executives (Sales VP, CFO, CMO, VP Operations, VP HR). Video chats, such as an “Ask the CEO” forum, might also be considered.
  4. More leverage in the Compensation Plan. Move, for example, from an 80/20 compensation plan for sales people to a 70/30 plan.

Survey Your Salesforce

Not sure your Sales Compensation Plan or talent management programs need a major change to accommodate Millennial salespeople?

Consider evaluating where you stand today by conducting a Salesforce Survey with the entire salesforce asking for the recipient’s age category and opinions on a number of topics, e.g., career pathing, training, current compensation pros and cons, and incentive leverage. The survey results can offer a baseline snapshot of today’s situation. From there, discussions can be started to lay a forward path.

If you would like to discuss this topic or your other salesforce compensation needs further, please contact Tim Weizer at tim@salescne.com or 312-479-6411 or Neil at nlappley@lappley.com. Also feel free to share this article with anyone who might be interested.

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[Salesforce Alert June 2018] What Behavioral Economics Teaches Us About Salesforce Compensation

In his 2015 book Misbehaving, Nobel Prize-winning economist Richard Thaler addresses the concept of loss aversion and its impact on decision making. “Roughly speaking,” he asserts, “losing something makes you twice as miserable as gaining the same thing makes you happy.” For this reason, given the choice, people tend to put more energy into reducing losses than actively pursuing gains. In a sense, he says, “Loss aversion operates as a kind of cognitive nudge,” the inversion of no pain, no gain.

Humans Aren’t Rational

A professor at the University of Chicago Booth School of Business, Thaler won the Nobel Prize in Economic Sciences for his groundbreaking work in behavioral economics. Among his greatest contributions: challenging the notion that we are always rational beings and pioneering the idea that often we act in ways inconsistent with economic theory. In the spirit of transparency, I am also an alumnus of the Booth School.

So, why does loss aversion matter to salesforce compensation?

Consider a recent story in The Wall Street Journal reporting on a new compensation plan for Bank of America’s Merrill Lynch unit. Critics of the plan argue instead of rewarding brokerages for growth, the plan punishes them if sales targets aren’t meant.

The plan emphasizes cross-selling of Bank of America’s retail-bank products, rewarding brokers with more new clients and referrals to other parts of the bank. So, while revenue growth still matters, asset and liability growth matters more for broker compensation.

If minimum sales targets are not met, the average broker generating $1 million in revenue could lose up to $10,000 from their monthly paycheck, a 2% drop in pay. Conversely, brokers meeting the new targets will receive an increase in pay.

Bank of America executives say the new compensation plan is designed to boost shareholder value and retain Merrill Lynch’s top performers for the long term.

Carrot or stick: What works best?

The Merrill Lynch example illustrates an important issue every VP of Sales confronts: what works better to motivate more sales people to equal or exceed their assigned sales quota? Do penalties or rewards spur the most asset growth? How do companies move the performance distribution of salespeople to the right of the status quo?

The loss aversion principle offers food for thought. Let’s say, for example, that the salesforce incentive plan has four components. One of them is product mix with a weighting of 25% and an on-target payout of $X. The salesperson is paid the $X upfront when the year’s plan is communicated. At the end of the year, if the product mix quota was not achieved at 100%, then the $X would be clawed back.

Under this scenario, there will certainly be individual winners and losers after a major change in compensation structure like the one Merrill Lynch has made. That’s why a good deal of time and attention should be paid to developing and communicating any new sales compensation plan.

Sum and substance

Are you considering changes or new incentives for your salesforce compensation plan? Often change is advisable when a new corporate strategy is being implemented or to attract and retain the right kinds of sales people. Experimentation and adjustments that align with changing market forces is beneficial.

If you would like to discuss this topic or your other salesforce compensation needs further, please contact Tim Weizer at tim@salescne.com or 312-479-6411 or Neil at nlappley@lappley.com. Also, feel free to share this article with anyone who might be interested.

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