Tariffs' Impact on Company Profits & Incentive Compensation Plans
5/6/2025
By Mary Rizzuti and Gene Camm
Tariffs are expected to increase costs and potentially reduce sales, significantly impacting company profits and, consequently, incentive compensation plans. Depending on the impact of tariffs on an organization’s pricing and margins, leaders must be proactive in reviewing and updating their incentive compensation and sales commission plans.
How Will Tariffs Affect Incentive Compensation Plans?
Tariffs are typically treated as costs companies incur, whether paid on imported goods or other transactions. The specific impact of the tariffs will be determined by whether the organization is acting as a principal or an agent in the transaction. The principal is considered the main party in the transaction and is responsible for the tariff cost, which is an expense that directly reduces net income. On the other hand, the agent acts on behalf of another party, and the tariff is typically treated as a reduction in the transaction price, not a direct expense.
Sales Commissions, Bonuses and Incentive Compensation
Extra costs associated with tariffs will have an impact on incentive and bonus compensation plans that are tied to company profits. Depending on the organization’s stage, leaders will react in different ways. For example, if the company is in growth mode and trying to maintain or gain market share, it may decide to absorb the cost of the tariffs. On the other hand, if the company is more established, it may pass the cost of the tariffs down to the end consumer, which could impact its sales.
In either case, sales incentive compensation programs that are tied to financial metrics of organizational performance will be affected by tariffs. Bonus and incentive compensation programs that reward participants based on profits will be impacted based on profitability (if absorbed) and by loss of revenue (if passed along). For example, business development professionals or salespeople often earn 50-100% of their compensation based on variable compensation. 77% of U.S. businesses use some form of variable pay, and variable compensation accounts for roughly 15% of employees’ salaries across all levels and industries. Therefore, the impact could be far reaching.
Annual Incentive Compensation Plans
Tariffs will have a greater impact on annual incentive plans due to the instability of the situation, as annual results will be affected based on goals pre-established at the start of the incentive period. While monthly and quarterly plans have the flexibility to adjust according to the tariff impact, they are typically built around an annual budget and performance metrics.
Importance of Planning Ahead
Companies that build and manufacture in the U.S. may still be impacted based on where they source their products. Even if they are sourcing their products from U.S.-based sourcing companies, there may be an unknown about where the sourcing companies are obtaining the materials.
Whether organizations will feel the impact of tariffs during 2025 or if it will roll into 2026 is still uncertain. Companies should create dual impact models for incentive plans based on the company’s strategy for handling expenses. It’s essential to start having discussions on the impact of wages (not just incentive plans) and how the company is going to fund annual compensation increases, hiring, and retention, with potential downsizing.
