True Cost of Compensation
I’ve been developing compensation plans for over 20 years. For the first 10 years I worked inside a large consulting firm that had 8,000 employees located all over the world. I generally developed plans for very large sales forces in multi-billion dollar companies that spanned all industries (banking, insurance, manufacturing, food ingredient companies, staffing, hospitality, etc.). For the last 10 years, since starting Prosperio Group, I’ve focused primarily on working in the transportation industry. I always liked working with smaller companies because I dealt directly with ownership or top leaders who were empowered to make their own decisions. With larger companies, my design team seemed to care more about making it look like they were taking the process seriously (by spending lots of money and wasting lots of time) than actually changing things that made a true difference to the business. When you are talking with the owner of a small brokerage about where money is going that could otherwise be going to his or her children’s college fund, you KNOW you have their full attention.
However, there is one thing that I’ve bumped into repeatedly that is puzzling. For most brokers, compensation expense takes up 30% - 50% of the total gross margin generated by the company. More money is spent on compensation than is spent on the TMS system, the website, insurance, displays for trade shows, or pretty much ANY other single area of expense. However, it is not uncommon for me to be asked something along the lines of, “Can’t you just tell me how so and so does it?” or “Just tell me the answer. I just want the quick fix.” or “How does everyone else do it?” or “This is how we did it at my old company, why can’t we just do that here?”
No Quick Fixes
Unfortunately, there is no quick fix or “one way” that everyone does compensation. Even within an industry as clearly defined as this one the nuances between organizations still blow me away. Some brokers are 100% spot market, others have a high percentage of their business that are long-term contracts. I’ve worked with many freight management companies (typically LTL heavy that take on all business from their customers) who are adding freight brokerage services to deal with occasional truckload business. I’ve worked with Intermodal providers who provide truckload brokerage as a value-added service. I’ve worked with brokers who focus on over-dimensional freight, high value freight, DOD freight (that was something I would have rather NOT learned about), temp control freight, brokers connected to trucking companies, brokers connected to warehouse or supply chain providers, brokers connected to freight forwarders, and of course standalone brokers. I’ve worked with privately held companies (often managed by some assortment of family members – brothers, spouses, parents/children, etc.), publicly traded, or venture capital owned. I’ve worked with brokers with operations in the US, Mexico and Canada. I can safely assert: no two brokers are exactly alike. So why would one company’s compensation plan work well for another company?
One of the key pieces that I think people miss about compensation, is that it is at least as much about psychology as it is about math, probably more. Your compensation plan speaks volumes about the culture of your company. A company with 100% commission and strict rules about charge backs presents a very different image than a company with higher salaries, a generous profit sharing plan, and an annual Christmas bonus. Neither is “right” or “wrong,” they are just different. But what is wrong is to adapt a plan from a competitor who has a very different culture than what you really want to engender in your organization. I’ve watched companies latch onto an idea they picked up from a competitor, or one idea they got from attending one of my sessions at the annual conference, or from one chapter in my book (Taming the Compensation Monster), and have it damage their culture and lead to employee resentment and disgruntlement. I’ve also worked with companies that don’t want me to talk to employees as part of the fact-finding process. Instead, they believe that we should be able to develop compensation plans in a vacuum, without reference to the people who will be affected by them. In nearly every instance when I’ve reluctantly agreed to take this approach, the results have been less than stellar and sometimes disastrous. This is because none of these approaches take into account psychology or culture – they are focusing only on the math. Sure, there are better mathematical approaches than others (a marginal commission rate is almost always better than a straight commission rate) but that doesn’t mean a marginal commission is always the right answer. Sometimes it is, and sometimes it isn’t. Sometimes you can’t get away from a straight commission plan, or you need to do it very carefully and over a longer period.
From an employee’s perspective, there is little else that is as personal or as deeply impactful to their long-term job satisfaction as their compensation plan. Many employees mistakenly believe that management is bound by the terms of the initial employment contract for how (and how much) they are paid. Many (most) employees believe they are worth far more than they are, or they have heard fish stories about what competitors are paying. If you have changed compensation plans in the past, the way you handled those changes impacts your employees’ willingness to accept new changes. Did you listen to them or just shove changes down their throats? Did you look to restructure the plan for the betterment of both parties, or was your sole goal to reduce the amount of money being paid to the staff? If you have damaged trust with previous plan changes, you will have a much harder time with any future changes. If you have treated employees fairly and honestly in the past, then you will have more latitude with future changes and can do more experimenting with new and exciting approaches. You need to be honest with yourself about where your staff is in regard to compensation changes and adjust your approach to provide a level of change they can handle (unless you want 100% turnover). You will see more business improvement from a 50% right plan with 100% acceptance than from a 100% right plan with 50% acceptance.
You also need to consider your long-term goals. The best compensation plan for a company looking to sell in the next two years will be radically different from the best plan for a company that is looking to develop strong bench strength among existing staff to create a stable company that will be around for many decades to come. If your brokerage group is a small part of a larger organization with lots of policies and procedures, then there may be compensation approaches that are common in the brokerage world that are simply not available to you because corporate would never approve of them. You will need to spend time finding a solution that accomplishes your objectives, is market competitive, and yet aligns with corporate guidelines.
Along those same lines, there are practices in use in this industry that may be common but are far from what would be considered “best practice” and sometimes are of questionable legality (hint: a W2 employee should not be paying other W2 employees out of his/her own pocket). As many learned the hard-way in 2016, just because one broker classified certain workers as exempt from overtime pay did not mean that other brokers would not be sued for doing the same. You should always have legal counsel review your compensation plans to be sure they are aligned with the highly variable state laws (CA, NY, and NJ present particular issues, but there are odd overtime rules in NV and CO as well).
Doing It Right
Unfortunately, doing this right takes time and considerable effort, but when it’s done right the benefits are long-lasting. I always chuckle a bit when a client, usually sheepishly, tells me they have made changes to the compensation plans we developed together a few years prior. I chuckle and then give them a high five because they are showing me that they have gotten the full value from our work together – they have learned how to manage their own compensation plans, to work them, to develop them, and to evolve them. That’s what you have to do. It never stops. You should be constantly evaluating and testing your plans to be sure they are still doing what you need them to do, and change them if they are not. You should be tweaking the plans annually (use caution about tweaking too frequently, however), and you should look to do a major “step back and review” every three to five years. If you’ve changed your TMS system more than you’ve changed your compensation plan, you are likely not taking your single biggest business expense seriously enough. As with anything in life, true value comes from time, focus, and effort. The quick fix will not provide lasting change, as alas, there is no magic bullet for compensation.
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A version of this article was published in the October 2017 issue of The Logistics Journal.
Beth Carroll is the owner of Prosperio Group, a compensation consulting firm that helps clients get the maximum ROI from their compensation dollars by helping them develop compensation structures and incentive plans that align with company goals and objectives and increase motivation and urgency among staff. Beth has worked with over 100 of our members since 2007 and is a regular speaker at the annual conference. Beth recently published a book on freight broker compensation: Taming the Compensation Monster, which can be found on Amazon. Beth can be reached at firstname.lastname@example.org