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Should a transportation/logistics broker be on 100% commission?
The term commission is often misused and burdened with connotations. Some of my clients will not consider paying brokers any other way than by using a commission, while others have started a design discussion with me saying, “We are not a commission organization and we will never be a commission organization!” Clearly the term “commission” here means more than “a percentage of revenue or margin paid as a form of compensation” (which is, by the way, the strict definition). There is nothing inherently evil in using a commission approach to deliver a portion of an employee’s pay. In fact, it can be one of the most motivational tools in a sales compensation consultant’s arsenal. However, a commission mechanic must be used with caution, in the appropriate circumstances, and with a full understanding of the risks involved.
First a bit of a Sales Comp Lesson:
Target Total Compensation is the amount of pay you want an employee to earn at 100% performance. This is the number that should be compared to any market survey AND it is the number you should using to discuss salary packages with potential new hires. Miscommunication on this front has inevitably led to very different understandings of expected pay.
Pay Mix is the amount of pay delivered from salary (fixed compensation) and incentive (variable compensation). A 50/50 pay mix means 50% of the target total compensation for a role is delivered from salary and the other 50% is from incentive.
Incentive compensation can be delivered using one of two primary mechanics: commission or bonus. A commission (as stated above) is a formula that delivers pay as a % of revenue or margin (most likely margin for brokers, but it can be revenue, or line-haul revenue, or some other measure depending on your business). A bonus is a formula that delivers pay for attainment of a goal. Contrary to popular usage, a bonus is not inherently discretionary. In fact, it should be objective, relevant, and controllable by the individual, just as a commission would be. The fundamental difference between the two is the importance of raw volume.
An example will help illustrate:
John is a broker who has been with the organization for 10 years and has built up a sizable client base. John has been given many house accounts with inherently good margins and he seems to generate about the same amount in margin dollars (revenue minus carrier costs) year after year.
Sally has only been with the organization a few years, but has shown tremendous promise in acquiring new accounts and has been asked by management to help them break into a new type of freight. Initially they know the margins will be low as the company builds its reputation, and the volume will be lower to start with as well. In order to allow Sally time to devote to this new effort, her existing accounts will be moved to John.
Ok – I stacked the deck a bit on this, but I want to make the point. In this circumstance, a straight commission approach to delivering pay will unfairly advantage John and unfairly disadvantage Sally. The more appropriate methodology would be to assign each of them growth goals and pay them equally upon attaining their goal. For example John might have a goal of $1,000,000 in margin dollars and be paid $20,000 upon attainment of this goal, while Sally might have a goal of $250,000 in margin dollars for this new line of business she is working on and she might ALSO be paid $20,000 upon attainment of her goal. You can of course convert both of these to commission rates (John’s would be 2% and Sally’s would be 8% and presumably management would be willing to pay a higher “rate” to Sally for helping them break into a new area, whereas it would not be sensible to pay the same “rate” to John for babysitting business that has been largely handed to him). I do not recommend communicating this plan using a commission rate, however, as the very next question you will have to answer will be from John as to “why is Sally’s “rate” 4x higher than mine” – also, you will find yourself right back in the bind you were in before when you need to move accounts around. Next year, if you use a bonus mechanic, you will tell John that his goal is now $1,100,000 and Sally’s goal (assuming she has had a great year) is now $500,000, and both will still be paid $20,000 when they hit these goals. Or maybe you’ve moved some accounts away from John and his goal is now $900,000, but he would still earn $20,000 for attaining this goal.
Where it DOES make sense to use a commission mechanic is when you have a level playing field and everyone has an equal opportunity to make his/her own results (as is almost always the case with agents), and when the role in question is fairly low level and highly transactional. A commission mechanic (especially when the salary is little or non-existent) sends a strong message of “you are your own boss” to the employee and management may find it hard to get employees to follow corporate guidelines about things like attending training meetings or taking vacations. In some cases this is exactly the environment that needs to be created, especially if the organization is a start-up or is in high growth mode. However, when an organization starts to mature and diversify into different roles, commission mechanics become problematic if they are weighted too heavily in the compensation plans.
What people often overlook when developing compensation plans is the power of AND. They get caught thinking they must choose between bonus OR commission, or between an individual plan OR a team-based plan. If you think about the fact that most well-designed incentive plans have between two and four components, you realize that you can actually accomplish quite a lot within the bounds of a still relatively simple plan design.
For example, a solution for John and Sally above might be for them to have a plan such as the following (let’s assume the target incentive amount is $25,000 and they each have a salary of $25,000).
50% of the plan ($12,500) could be based on attainment of a defined goal ($1m for John and $250k for Sally) and paid using a bonus mechanic.
30% of the plan ($7,500) could be based on new customer acquisition and paid using a commission mechanic (assuming both are equally capable of landing new accounts).
20% of the plan ($5,000) could be based on attainment of an overall team goal that combines John and Sally’s results so they are rewarded for supporting and covering for each other. An approach I like to use here is to pay a bonus when the goal is reached (which would be the $5,000 payment) and then use a “drop-in” commission for all results over goal (say an additional 1% to each of them for all sales generated by the entire team over goal).
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