5 Steps for Communicating New Sales Compensation Plans

Beth Carroll

For some this is exciting, as it means the opportunity to earn more money. But for most it's an event that is met with skepticism and even dread. In some cases this fear is well-founded. If the reps work or have worked for an organization that has changed compensation negatively in the past, they might have developed a conditioned response to the communication of a new comp plan. If the reps have been treated badly enough in the past, and have gone through several negative changes, then the fear likely has morphed into indifference, disregard, disrespect and disdain.

Assessing Compensation Plans

Beth Carroll

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.

Great Design Teams Create Great Compensation Plans

Beth Carroll

Success is not about the revenue generated, as we've seen small companies be far more successful on many dimensions than some of the largest publically traded companies. Nor is success (at least the way I measure it) based on the size of the bank account of the CEO. To me, success is about how employees feel about an organization. Do they feel a sense of "ownership" – is it something they have been entrusted with to care for, and do they take their duties seriously, acting with passion and dedication? This creates sense of loyalty and ownership of any company initiative creates success.

Freight Broker Commission Rate

Beth Carroll

As compensation consultants who specialize in the transportation and logistics industry, one of the most common questions we are asked is “What is the standard freight broker commission rate?”  While this question is posed with the best of intentions, it is unfortunately off the mark. The truth is that commission rates, like any form of incentive, should be a reflection of a company’s business strategy, freight profile, and organization structure.  A better question to ask would be “What is the best commission rate for my organization, given our unique circumstances, strategy, and goals for the future?”

Truck Driver Pay During Shortage

Beth Carroll

Truck driver pay for performance programs are flying fast and furious and truck driver pay is THE hot topic at the 2014 ATA MC&E conference . You can’t walk by a single group of attendees without hearing them bring up truck driver pay within 15 minutes of the conversation starting.

Selling Your Sales Compensation Plan to Management

Beth Carroll

An important step in many sales compensation design projects is the executive review. At this meeting the plan designs that you and your design team have worked so hard to develop during the past several months will finally be presented to the senior leadership team (sometimes called the steering committee or the executive committee). Ideally, the executives will ask a few pointed questions, conclude that you and your team have done a great job, and approve the plans as recommended. But sometimes an influential executive will challenge the fundamentals of the design or, even worse, the need to change the compensation plans at all, and the work of the design team seems to vaporize right there in the room.

Overpaying Sales Staff?

Beth Carroll

When done well, it enables companies to develop the right mix of individual motivation and team-work while balancing the needs for both short-term financial gain and long-term strategic positioning. When done poorly, however, companies can end up creating at best a culture of complacency and entitlement, and at worst a culture where sales representatives are working to maximize their own incomes to the detriment of the company.

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.

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