Why 100% Variable Pay Often Produces Undesirable Results

Beth Carroll

Many sales leaders and CFOs believe paying company sales representatives as if they were agents (100 percent variable pay) strengthens alignment between a company’s objectives and sales representatives’ focus and results; however, the absence of a base salary often has an adverse effect with significant unintended consequences: Lack of Control, Complacency, and Limited Flexibility.

Performance Measure Selection

Beth Carroll

Performance Measure Selection is Critical to Incentive Compensation Success. Defining these details for all of the roles in your organization can be tedious to say the least, but it is ESSENTIAL for a good plan design.  It’s also essential that you have many heads working on this together.  One person cannot think of all angles.  For example, something is missing from the measures part of the table below that looks like it might be pretty important for this role.  Can you see it?  I’ve highlighted the miss on the next table and added in an incentive to cover it.  Notice I don’t say what kind of incentive (commission, goal, bounty, etc), just “incentive” as it will be in the next phase that we develop the mechanics of the plan (we call this part Detailed Design, and it’s a lot of fun).

Performance Measures - The Heart of Incentive Plans

Beth Carroll

Now, since we have a pretty good idea of how much to pay, we need to consider what it is you are paying for. It is not, or should not be, as simple as just paying for gross profit (net revenue), as you probably need different types of gross profit to run your business.   You need gross profit from existing customers, and you need gross profit from new customers. You need gross profit that maximizes your network, and minimizes your cost to serve. If you only pay your employees for any gross profit dollar that walk in the door, you may find you are getting gross profit dollars that are pretty wrinkly and worn out, when you’d really rather get some nice new crisp bills in hand. So, how to decide what to use in your incentive plan?

Creating A Motivational Incentive Plan

Beth Carroll

Upside is the amount of pay that a top performer can earn, and downside…well…you can guess that one…it’s how much risk there is on the downside for a poor performer.  Leverage refers to the plan design ratio of the top 10 percent (decile) performer relative the median performer, and dispersion refers to the amount of leverage that a plan actually achieves.  So let’s unpack these one at a time.

Compensation Pay Mix Selection

Beth Carroll

What is the right pay mix for Freight Broker Carrier Sales (Dispatcher) Roles? Carrier Sales roles are typically less prominent than either of the two main sales roles, but often they are compensated as 100% variable. This causes psychological stress as there are significant amounts of the pure carrier sales role that are outside of the carrier reps’ control…with the two biggies being the type of freight solicited and the price negotiated for that freight. If the sales rep is doing a miserable job, the carrier sales rep who is downstream will be stuck trying to make the best of a bad situation. How fair it is to compensate them solely on the total outcome when they had to start with bad inputs?

Dangers of Extreme Compensation Plans

Beth Carroll

In the world of compensation options (and it’s a bigger world than most realize), we see two extremes: 100% variable pay, also known as 100% commission, and 100% salary. Extreme compensation plans do not provide the best motivational bang for the buck and companies who are using one or the other extreme are missing out on higher levels of motivation, reduced turnover, higher revenue, and lower compensation costs.

Motivation & Morale On A Tight Budget

Beth Carroll

One approach some Transportation & Logistics companies took for dealing with the recession was to eliminate incentives or cash compensation and revert to a 100% salary approach, which gave them the ability to manage a fixed cost of compensation and deal with productivity and staffing from a purely 1:1 perspective (if the person wasn't generating enough to justify their salary, they didn't tend to stay around very long). This is not a position that can be (or should be) maintained for long in this industry as there is too much bottom line impact that the truck finders, brokers, customer service reps, account managers, and sales reps have on the business.

Connecting Incentive Pay & Performance Reviews

Beth Carroll

Incentive plan measures must be both objective and quantifiable but performance plan measures can be subjective and qualitative. Because so many elements differentiate a successful sales representative from an unsuccessful one, it is critical to create two sets of performance measures: one for the incentive plan and one for the performance management plan.

Four Tests to Measure the Effectiveness of Your Incentive Plan

Beth Carroll

Most organizations use some kind of pay for performance program for their employees. There are cash incentive plans and non-cash incentive plans. The non-cash incentives include trips and recognition programs.

Whenever you implement or change your incentive plan, you should use the best performance measures possible.  A “performance measure” is the metric by which you are gauging an employee’s results, such as revenue, profit dollars, profit percentage, net income, EBITDA, number of new customers, number of customer calls, number of invoices processed, etc.

Role Definition

Beth Carroll

Many organizations believe that to have full role definition clarity, each sales rep must have a unique role and must be compensated uniquely as well. This results in an over-abundance of roles and compensation plans. There is a point of diminishing returns when trying to sub-divide roles into the most precise functions, and one of the keys to successful compensation plan design is understanding when you have reached that point.

Communicating Compensation Plan Changes

Beth Carroll

Communicating changing sales compensation plans is never easy. The salesforce will always start with the assumption that the new plan is going to take something away and will be skeptical of anything the company tries to push as a "positive change." It usually takes two payout cycles under a new plan for the reps to figure out what behaviors they need to change to maximize their pay under the plan, and this is the point at which your top performers will finally stop holding their breath about the new plan design (provided, of course, it is designed well and truly rewards top performance in a fair and equitable manner).

Lessons In Change Management

Beth Carroll

When rolling out a change initiative it is helpful to understand the psychology of the members of the affected group. The Vocality/Predisposition Matrix (VPM) (below) can help managers identify (before and after the change) those parties who may need some extra attention to get them over the hump of accepting the new program.

Common Freight Broker Compensation Models

Beth Carroll

…After going to all this effort to restructure the business it would be a shame to continue paying using the antiquated “5% of margin” approach for everyone.  So let me hypothesize about what some compensation arrangements would be for the different roles Rick describes.

Defining Business Goals - 5 Steps

Beth Carroll

This article will take you through the steps required to define business goals and put the goals into action. In this first part we will look at establishing the baseline, setting the goal, and doing the analysis to figure out how you will get from A to B. In the second part we will break down the goals established in step #3 into accountabilities for the different roles in your organization and then discuss how you might tie these accountabilities to a tightly woven incentive plan framework that aligns each person in each role to the portion of your business plan they can control.

Sales Compensation 101 for Logistics

Beth Carroll

…you need to be very careful how you design your incentive plan or you just might end up dealing with some unexpected consequences, and possibly paying out more than you intended, or worse, getting no measurable return (or negative return!) for dollars you are spending.

Top Compensation Mistakes - Part 3

Beth Carroll

In Part 2, we examined Top Compensation Mistakes #3:  Not considering short-term and long-term unintended consequences, and Top Compensation Mistakes #4:  Not clarifying goals to enable the shift from transactional to growth-focused plans. We will now consider the last two mistakes:  Top Compensation Mistakes #5: Not understanding the legal ramifications of incentive compensation (yes, there are laws about incentive pay!), and Top Compensation Mistakes #6:  Not communicating and supporting the plans, and not following up with solid tracking and feedback.

Top Compensation Mistakes - Part 2

Beth Carroll

In Part 1, originally published in the Logistics Journal, we examined Top Compensation Mistakes #1: Not realizing that compensation is part of a complex and interconnected system, and Top Compensation Mistakes #2: Thinking about compensation as only an economic deal with the employees.  We will now look at the next two top compensation mistakes.

Top Compensation Mistakes - Part 1

Beth Carroll

We are often asked “what is ‘the right way’ to pay?” But there is no easy answer to this question. The “right way” depends on a variety of factors particular to each company. There are some definite wrong ways to pay, and this three-part article will outline the six most common compensation mistakes we have seen in our work with more than 40 transportation and logistics companies and over 14 years as a sales compensation consultants working with private and public companies from a variety of industries, ranging in size from small privately held companies to multi-billion dollar global giants.

Components of Well Written Incentive Plans

Beth Carroll

The risks of having poorly documented incentive compensation plans range from your employees not understanding the plan and therefore not being motivated by it (leaving your sales director scratching his head as to the lack of results, and possibly his lack of job!), to legal battles with former employees who are claiming they are owed back incentive pay due to vague, inaccurate, or misleading wording in the plan document. At a minimum, well-written incentive plans must have the following components

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