Assessing Compensation Plans

Are Your Compensation Plans Working?

I was recently asked by a medium-sized freight broker to provide a list of the things we look for when assessing the health of an incentive plan. That prompted the following list of key items that we consider when determining if a compensation plan may need to be revised. While this list has items specific to freight brokers, you can easily substitute your roles and economics in place of the broker specifics mentioned.

Here are the four areas of a compensation plan assessment that are key to know if your plan is working.

Organizational Structure Issues that are Often Compensation Issues in Disguise

  1. Is there role clarity or could efficiencies be gained by reorganizing staff? Do you have enough hunters focused on bringing in new accounts? Are account managers and carrier sales roles devalued to the detriment of your staff morale?

  2. Are sufficient support roles in use?  Pricing, carrier qualification/development, track and trace, order entry? Efficiencies and cost savings can be gained by offloading mundane tasks to lower cost resources.

  3. Do you have a career path for newer hires – so they can see how they can advance in both pay, position and responsibility?

  4. Are there team leaders/managers to "run the show" as needed?

Motivational Issues that are Probably Caused by Compensation

  1. Is your staff motivated to reach for higher attainment, or does everyone pretty much punch out as soon as the day is done?

  2. Are you experiencing unwanted turnover?

  3. Are your people working together or against each other? (Hording trucks, stealing each other's loads, etc.)

Economic Indicators that your Compensation Plan is in Trouble

  1. What is your cost of compensation as a % of your GM$?  (Take all W2 wages, but not taxes or benefits, of your staff (exclude owners) and divide by GM$).  Healthy ranges are between 20% and 50%, but we really like to see it in the 30% range.

  2. Is your cost of compensation decreasing over time?  If not, your employees are the only ones gaining from your business investments.

  3. Is anyone (other than senior management) paid > $200k?  Not that I'm against earning lots money if it is justified, but I've seen SO MANY problems created by unjustifiably high pay levels for brokers.  The highest earners are often the biggest problems, and the more of them you have, the more problems you have (and disgruntlement among everyone else…probably). It also will make it really hard (possibly impossible) to change your compensation plan as the high earners may have acquired more power than the owners would really like them to have. There are brokers who are paid much more than $200k and worth every penny…but these are actually few and far between…so consider this a warning sign, but not an automatic problem. If you are ok with the payout levels and still feel like YOU are running the business, then it's not an issue.

Basic Compensation Plan Design Best Practices that should be followed…ALWAYS

  1. Do you have the right balance of needs reflected in your plan? – Individual vs team, short-term vs long-term, and financial vs strategic? Hint- if you only pay a monthly commission on GM$ the answer to all of the above is NO.

  2. Is the pay mix appropriate (% base vs % incentive)? I typically don't like to see the incentive (at target) be > 50% of total pay as this puts too much pressure on the employee to manage things that are actually out of their control; panic is not a good long-term motivational tool.

  3. Is a target incentive defined?  How many are earning at or above target?  Do the employees know what "good" looks like?

  4. Does your plan use goals? Do employees know what is expected of them?

  5. Is there leverage in the plan?  A straight commission plan has no leverage…you need to have tiers to create a non-linear payout and to give you something to adjust other than rates when economic conditions change.

  6. Is there a system in place for performance reviews with the potential for salary increases…or does the comp plan make salary increases impossible or a negative event (draws make salary increases a negative thing and remove a motivational tool you could be using).

I think you can figure out what constitutes a good or bad answer. Even a few bad answers indicate you can make significant improvements in your business performance and economic results by revising your incentive plan. Compensation is at the heart of a business…and a sick heart can result in many, sometimes seemingly unrelated, problems.

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