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What are the three top compensation choices for transportation brokers?
Developing compensation plans for an organization is a bit like cooking up a gourmet meal for a group of people with very particular tastes. Some people might like their meal spicier with more exotic ingredients; while others are strictly “meat and potatoes” folks who like to keep things simple and straight-forward. Some like a dash of competition to spice things up, while others want a balanced meal of teamwork and cooperation. Some need to focus on adding variety to their diet by bringing in new customers or new types of freight, while others are tired of only eating small fish and are looking for one or two big fish to provide more stability. Whatever the desire, a compensation meal can be developed to satisfy every taste and meet every organization’s “nutritional” needs. And while no two plans will be identical, we’ve found there are three top compensation choices - “menu choices” - that transportation brokers tend to order in their compensation meals more than others: Bonuses, Bounties, and IPMs.
Menu Choice #1: Goal-based bonuses
If commissions are like ground beef, goal-based bonuses are like a filet mignon. Organizations tend to use a commission (an incentive calculated as a % of net revenue or margin) as their initial approach to variable compensation. It’s easy to do the math and provides a direct link between variable compensation costs and company financial performance. Commissions can be very motivating and can create a sense of urgency because the sales rep, broker or dispatcher is “sharing” in the risk and upside. Often a commission is used when there is no salary to go with it (also called a 100% commission plan, very common for agents), as management believes this will drive an employee to work really hard to maximize each transaction, because if they don’t, they don’t have any income. However, as often as not, this backfires. Inequity creeps into the system, roles become blurry and the staff starts fighting over who gets credit for a load. What started out as a motivational and focused incentive plan turns into a distraction. Similarly, as organizations grow, management typically starts to expect certain behaviors of its employees, like keeping office hours and following ethical guidelines. With no “salary card” to play, the employee will more than likely act like a free agent who could easily find a job with the next brokerage house down the road (and possibly take “their” customers with them).
Another similarly puzzling thing starts to happen. Employees leave at 4 PM, on the dot. Management wonders why because if they stayed longer they could make more money. The employees know this, quite well actually, but they’ve made the decision that the $10 or $15 or $30 off the next load is simply not worth the time it would take to stay and close that next deal. Under most commission-based plans, the only way an employee can double his/her income is to double production, and for most (unless they are given a large contracted account, or start managing EDI freight), this is just not possible.
For an incentive plan to be motivational it has to be externally competitive and internally equitable. This means you need to pay your staff a level that is commensurate with what they could earn elsewhere, not just within this industry but at other jobs for which they may be qualified. It also means they need to see that compensation is fairly distributed internally based on skill, effort and value created for the company. Too often management equates volume with value created; however, as many companies have learned, that is not always the case. The top “producer” may have inherited a prime account or may be managing all the EDI freight, and someone who is far lower down the production scale may be tearing up the phones and landing new accounts left and right. Under a commission approach the person who handles more volume makes more money, regardless of how this compares to external market pay levels or internal equity in terms of value creation. A commission plan can end up over-paying a poor performer and under-paying a top performer.
Shifting to a goal-based bonus can solve many compensation ills, but it is a more sophisticated approach that requires more time, thought, preparation and management. It is not something that can be jumped into lightly, nor is it appropriate for managers who really don’t want to manage their business. In addition, you need to have some history under your belt in order to be able to set a goal that will be realistic and yet contain the right amount of stretch. A goal-based bonus that uses an unattainable goal is worse than a bad commission plan. Goals must be challenging and yet perceived by the staff to be attainable with reasonable additional effort (and working 24/7 is not “reasonable additional effort”).
A goal-based bonus requires management to set a goal for each person (or the goals could be team or role-based) and calculate pay based on the percentage of the goal attained. However, this should not be a 1:1 relationship. We often see goal-based plans that pay 90% of the target incentive at 90% of the goal, and 110% of the target incentive at 110% of the goal. You’ve just put your fillet mignon in the toaster oven if you are doing this. A well-designed goal-based plan uses different slopes and different performance ranges, as in the figure below:
What’s important to note in this example is that the slope above 100% of goal is greater than it is below goal. This is often referred to as acceleration in the payout rate, and serves to create excitement and additional rewards for reaching and exceeding goal. It also makes it more likely that 200% or even 300% of the target incentive can actually be earned by top performers. Of course, management needs to set these goals and inflection points at places that are sensible from an economic standpoint. The objective is not to give away the farm, but to create a win-win situation. Once your fixed costs are covered (which should be a good guideline for where to set that goal), then you can afford to share more of the profits with those who are producing them. But there should also be some “downside” that goes along with the “upside”, meaning there is a point below which no (or very little) incentive compensation is earned. This is called a “threshold” and is shown at 50% of goal for the red line above, and at 80% of goal for the green line. It is also important to note that the lines do not continue at the steeper slope forever; instead, the slope tapers off, without being capped. This provides some windfall protection for the organization and keeps payouts at very high levels of performance attractive, but reasonable.
Once you’ve made the decision to use a goal-based bonus as part of your compensation “meal”, be aware that there are hundreds of ways you can prepare it. You can have a long, slow slope as in the 0-150 example above, or a tighter, steeper slope as in the 80-120 example. The right choice depends, in part, on how confident you are in setting goals, on the type of plan you are transitioning from, and your desired pay frequency. If you are not convinced you should move entirely away from a commission plan, you can even develop a goal-based commission which combines aspects of both types of mechanics. The possibilities are endless. So…would you like your filet medium or rare, with sautéed mushrooms on top or wrapped in bacon, marinated in a garlic pepper rub or prepared en croute and stuffed with crab and lobster…(you get the idea, and we’re getting hungry!)
Menu Choice #2: Bounties
It’s common for our clients to tell us that they aren’t getting enough new customers, or that the new customers they get aren’t sticking around. They get one or two loads from a new customer, but can’t get enough traction with the customer to get 10 loads, or 20 loads. Their sales reps complain that operations doesn’t care about the new customers as much as they do about their existing customers, and they are probably right. It’s difficult to work with someone new. You have to learn their business, their lingo, and get to know their quirks. It’s much easier to handle a customer you already know well. Likewise, if the sales reps are doing double duty managing existing customers and being asked to cold call new customers, they will fill their days with existing account “issues” and leave cold calling to the end of the day (if it’s done at all). This is simply human nature and not an indication that they are lazy. You need to create extra motivation and excitement around getting that new customer, or getting the 20th load from a new customer, or getting a new type of freight from a customer…whatever result you are looking for that supports your long-term business strategy. So, balance out your compensation meal by adding a side of “bounty.”
A bounty is a form of incentive payment that pays a fixed amount for attainment of a specific objective. As with the goal-based bonus, the possibilities for bounties are all but endless; here’s a sampler from some of our recent compensation design work:
Every member of an operations team receives $200 when a new customer ships its 20th load
A freight finder receives $200 when a new customer reaches $4,000 in gross margin, and another $200 when it reaches $8,000
A business developer (elephant hunter) receives $3,000 for a new small account, $5,000 for a medium-sized account, or $7,000 for a large account when a minimum qualification level for each is reached (size may be based on number of loads shipped per week or on anticipated annual freight spend)
An account manager receives $500 when $3,000 in net revenue is obtained from a new lane, new location or new type of freight from an existing assigned account
The devil is truly in the details in terms of designing bounties. You must clarify what results qualify to earn the bounty, and the expiration date (you typically don’t want to pay a bounty if it took 10 years to reach the desired level of business). What is a “new” customer? Is it a customer you have never done business with or one you haven’t done business with in the last 12 months? (Be sure to consider seasonal shippers if considering a period less than 12 months.) Is it a new lane or location or a new bill-to? To some extent it is the employee’s job to argue that everything should now qualify as a new customer (just as it’s their job to argue for lower goals when you switch to a goal-based plan). Expect these arguments, and learn to be reasonable without being a push-over. Not everything should qualify for a bounty. If it did, the bounty would not work as intended as it is meant to reward for the more difficult, complex, and strategically valuable sales. But at the same time, there will be circumstances where a type of sale was overlooked when writing up the rules, and management needs to exercise good judgment in making allowances when it’s appropriate (and then amending the plan documents).
An important footnote: bounties are meant to be secondary parts of a balanced incentive plan that has a primary measure based on total financial performance. The idea is that you are consciously double paying for those activities that are strategically valuable to the company, but perhaps more psychologically difficult for the employee to accomplish. Continuing with our dinner menu analogy, bounties are your side dish. Your company may want a big helping of steamed asparagus while another company may prefer sweet potatoes with marshmallows and caramel sauce. Whatever you choose, however, the bounty is your side dish, not your main course.
Menu choice #3: Collaboration with an Individual Performance Modifier (IPM)
The last ingredient is like the bread that is found at every meal. It balances the nutritional picture and makes sure that everyone has the opportunity to eat something (even your accounting staff). Just as the basket of bread is shared among the diners, most organizations find they would like to have some common objective that all members of the team are working to meet. Using a team objective can provide balance to the overall incentive plan. It dampens down too much individual focus and rewards people for supporting each other when needed. If something they did does not count toward their individual financial metric, then they know that at least it will count toward the team metric.
However, companies often find that “share and share alike,” even for this smaller incentive component does not satisfy the objective of internal equity. Should someone whose contribution is clearly sub-par receive the same payout on this team incentive as someone who is always in the office early, rarely takes breaks, and frequently is found helping out and covering for other people? The solution lies in the use of an Individual Performance Modifier (IPM).
An IPM acts a bit like a performance review. It provides a place to include somewhat subjective performance metrics and creates room for a dash of management discretion. Whereas the gold standard for the primary incentive measure is: objectivity, measurability, relevance, and controllability, in the IPM this rule is relaxed. It’s ok to put one or two performance measures in the IPM that require subjective manager evaluation of things such as “attitude” or “teamwork” or “initiative.” The IPM does not carry primary (or even secondary) weight in calculating the incentive, but it can be a good mechanism to open the conversation about what constitutes good performance overall relative to just delivering results. It should address how the employee is obtaining the results that are measured in the other parts of the plan.
IPM’s can be simple or complex. They may include 2 to 3 components or 10. Your culture and the complexity of the rest of your incentive plan will determine the level of detail needed in your IPM. If you have a fairly complicated goal-based commission plan with multiple tiers and different crediting rules for different products or clients, then you probably shouldn’t have 10 IPM metrics. However, if the rest of your plan is fairly simple, or you are not sure of the readiness of some measures you’d like to put in the main incentive plan, the IPM can serve as good testing ground or catch-all. Some organizations really like doing regular performance reviews and do them very well; for others this has all the appeal of eating over-cooked spinach, so consider your culture and your management style as well.
The sample IPM below shows a fairly simple design that supports an existing performance review system that includes “Leadership Success Factors.” The IPM structure can be the same across the entire organization, the same for everyone in a role, or completely customized by individual.
From a payout perspective the total points earned determines the value of a modifier, using a table like the one shown below, which is applied to the payout under the team measure.
For example, if the calculation for “team financial performance” indicates a payout of $1,000 for a given individual, then a score of 180 points means they will earn 125% of $1,000 or $1,250. A score of less than 70 points would mean a payout of only $500 (they will lose 50% of the calculated incentive). This can send a powerful message because they will see how much money was lost because of poor performance on these components. And you should absolutely communicate it this way…
Initial calculation on team metric = $1,000 x 50% IPM modifier = Final payout of $500.
Amount lost due to IPM = $500
Putting It Together
Putting it all together with balance and realism. Now that you have three menu choices, be aware that the portions and the mix matter! Your incentive plan, as in a good meal, should be well-balanced. If you have only one dish (such as individual net revenue or margin) in your plan, you do not have a balanced plan. There is nothing rewarding the attainment of strategic objectives (forward looking measures), nor is there anything rewarding teamwork. That’s like putting your team on a meat only diet. It may taste pretty good at first, but you’ll end up with employees that get scurvy and develop high cholesterol.
Similarly, your expectations of the impact of the incentive plan should be realistic. Often an organization’s performance challenges have very little to do with the incentive plan and much more to do with role clarity, recruiting, and staffing. It truly doesn’t matter what you feed a pig, it isn’t going to learn how to fly. Some people are not going to work past 4 pm or pick up the phone and make a cold call no matter how much you offer to pay. It’s just not in their DNA. This problem cannot be solved with a new incentive plan design that provides a bigger carrot or heavier stick, but it may be solved by re-defining your roles, changing your recruiting strategy or taking a good hard look at your culture (are you providing your people with a sense of purpose for their work?).
When you have the right people sitting down at the table and being served a balanced meal that was developed for their particular tastes, you will find you have an organization that is both satisfied and motivated, in the ways you want and need them to be.
This excerpt was originally published in the December 2011 issue of The Logistics Journal when Beth was an owner of The Cygnal Group.