When you think about it, it’s true in just about any sale that the sales person must be part of a team that has:

• the right offering (services staff, right skills, right organizational capacity, …),
• the right delivery system (tools, processes, methodologies, management structure, …), and
• the right business model (pricing, contracting/terms, contractors vs. employees, …)

to create perceivable value for both the customer and the company. So why do the sales people earn variable pay while the others vital to closing the sale (and delivering the value) not earn variable pay?

The answer may be that some of the others do earn variable pay. But more often the answer is that the sales person’s own individual value creation is reliably measured in terms of sales closed (order value, margin value, hours booked, etc.) than that of others on the team, AND the sales person is interested in placing a meaningful portion of their at-market compensation at risk (20% to 50% is typical) in exchange for the opportunity to double or triple the amount risked if they are able to put together a banner year. That’s the basis for much of “sales compensation” as we see it today.

So, even if “it takes a village” to make the sale, the hunter who finds the opportunities, identifies the decision makers, puts together a strategy to win the business, and coordinates the internal team often has both risk and upside in their compensation plan tied to the results they manage to produce in order to encourage and reward their success.

Many of the other vital technical or industry expert contributors may also see the value they help create and express an interest in sharing in the upside – but they often are not interested in putting a meaningful amount of their compensation at risk.So while you may choose to offer spot awards and/or recognition to those non-sales associates who make a great contribution to closing an important deal, that’s not the same as pay at risk, a structured incentive plan, and exciting upside for the “stars.”

Of course, the above are only general guidelines and not legal advice.  Talk to your legal advisor to evaluate any proposed approach in light of applicable state laws.  Some countries outside the US, as well as some states in the US (the state of California in particular), have very specific guidelines about what constitutes a commission and how commissions should be paid.

If your plans offer limited acceleration for over-goal performance, and you include substantial training and networking in your PC event, you may want to dip deeper into the organization (even everyone at or over goal could be included) to make the award help drive goal attainment, and make sure you are providing training and development to your highest potential sales people.

If you recognize the top performing region every quarter with a splashy announcement, a fabulous dinner, and a cash award (~$1k grossed up each) AND you pay a handsome binary bonus when people achieve their annual goal, then you may want to make your PC more exclusive, top 10% or so only – maybe only those who hit a level of attainment above goal (e.g., 115% of goal or better.

These are just a couple of scenarios to illustrate. The idea here is that you need to design your President’s Club in the context of the whole reward system, the prominence and ability to measure true contribution of the sales people, etc. And while it’s totally appropriate to have goals about what percent of the sales force participates, it’s probably not a great idea to design the cutoff as “top xx%” – you don’t want one person to be able to win only if another loses. You want them competing with the goal, not each other.

How does your company’s President’s Club work? Comment below if you’re willing to share.

1. Relevant – the incentive program should be tied to meaningful business results. Define what matters to your business, what are your objectives for the year (improved customer service, increased revenue from new customers, better margins from existing customers, improved operating profit, etc.) and link your bonus to those objectives.

2. Controllable – to the extent possible, drive the measures as close to the individual’s line of sight as possible. If the overall objective is improved operating profit, think about how each person can impact that measure and tie a portion of the plan to the specific results they can deliver that help achieve this goal. For Accounting, that might be an A/R balance target of $0 > 90 days. For Sales, it might be improved top line growth which provides more revenue to work with to cover expenses. For HR it might be better recruiting performance with less turnover.

3. Measurable – if you can’t measure it, you can’t pay for it. Also, you need to be able to automate your measurements as much as possible or you will drive yourself crazy with the added administrative burden of calculating bonuses. For many roles, you will only need to calculate a bonus at most quarterly (for some annually is just fine). For Sales roles you will find yourself calculating pay more often, probably using more complex calculations, which is why sales compensation is a specialized compensation function and consulting discipline.

4. Objective – you need to avoid subjective payouts at all costs. These are demoralizing and risk legal challenges. Pool approaches, though common in small companies, are often based on a subjective allocation (“we’ll see how much extra we made and then share that with the staff”), but this does not provide anyone with a goal or ability to take control of their potential payout. Instead, any bonus under this type of approach ends up being just additional pay with zero motivational value.

Another caution for small companies is to not base their employee bonus on final operating profit (after management/ownership has taken out their disbursements) as this creates a conflict of interest and lack of control in the outcome for employees, as the more the owners take in disbursements the smaller the profit to use for employee bonuses. The employee bonus amount should be determined prior to owner disbursement and budgeted for as a fixed cost rather than just a “sharing of the profits” at the end of the year.

Generally small companies start from the wrong end of the equation when thinking about bonuses. They ask “what do we have left over” rather than thinking about “what do we need to pay to get good talent, and how can we divide that pay up between salary and bonus for the maximum motivation.” Obviously the economics need to work out either way, and the second approach requires more management involvement in controlling staffing costs, but the bonus targets should be built into the budget, allowing for upside if company and individual goals are exceeded.

The right system can have a dramatic effect on productivity and morale, because people will know what is expected of them and what they can do to change the outcome, plus it creates a map for the company showing how everyone fits together to achieve his/her own piece of the puzzle that will lead to the company’s overall success…provided the 4 watch-words above are adhered to in the design. A program that uses measures that are irrelevant to the business, uncontrollable by the employee, not measureable, and not objective would of course have a profoundly negative effect!

Rose and Carroll, WorldatWork Certified Sales Compensation Professionals™, saw a need for a practical book of sample compensation plans to provide insight into the many plan design possibilities and typical designs by type of sales role and industry.  The sample plans will be based on their combined 30 years experience in sales compensation plan design and on contributions from today’s leading sales organizations. Cases featuring a “before” and “after” approach will be included to help readers understand why the plans were changed and how these changes improved the company’s situation.

“The appetite for a view of other companies’ plans is significant,” said Donya Rose. “And, as we know from our consulting practice, the best designs spring from a broad understanding of the array of possibilities in sales compensation plan design. Knowledge of what other companies are doing contributes to a designer’s ability to choose the best plan measures, mechanics, and features for the specific situation their business is facing in the coming year.”

Brenda comes to us with over 9 years of experience from Towers Watson. She holds an MBA from Northwestern University’s Kellogg School of Management as well as a BSIE from Purdue University.

By Beth Carroll, The Cygnal Group

The six steps in incentive plan design are:

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation,  pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

We covered steps 1-3 in last months’ article, so if you missed last month’s article, make sure you go back and read it first, then come back to this article.

4.  Determine the appropriate performance measures & weights:  One of the best moments I have with any client is the “ah ha” moment when they realize they can do far more with an incentive plan than they ever realized — when they realize that it’s not a question of mutually exclusive choices, but of crafting a system that incorporates different parts of their business strategy.  The first taste of this comes with the selection of performance measures.  A performance measure must be objective, relevant, controllable, and measurable.  The best measures are often found on your income statement or in your business plan or sales strategy.  Common performance measures in logistics are:  gross margin dollars (net revenue), revenue, line-haul, operating income, gross margin percentage, number of new customers, number of loads, safety, on-time percentage, driver retention, closed leads, renewed contracts, and customer satisfaction.

The Design Team’s task is to consider for each role which are the best performance measures for that role.  The answer should be different for hunters vs farmers, and for managers vs line staff.  You want to start by casting a wide net and thinking about all the potential measures for each role. Some will not work because you can’t measure them (customer satisfaction often falls into this category), others will not work because they are not controllable by the individual and may need to be pushed up to higher levels of management (operating income is a good example, as it may be fine for a branch manager, but probably not for a broker). 

The second step is to consider scope.  Scope is the level of measurement selected, such as individual, team, region, or company.  When you combine scope with performance measure, you have created your first plan element.  Once you have tentative list of elements,  you need to assign weights to them.  The weights must add to 100%.  For example, if your broker role has a target incentive of $20,000, you might use 3 elements  weighted as follows:  individual gross margin 50%, individual new customers acquired 30%, region gross margin 20%.  A broker would earn $10,000 for individual gross margin at target performance, $6,000 for new customers, and $4,000 for region gross margin.  What if you’d also really like to include gross margin percentage and on-time percentage, but they aren’t important enough to assign a full piece of the incentive plan to?  You can use these types of measures as qualifiers (a minimum requirement for payout under another element) or modifiers (a way to increase or decrease payout under another element), but be careful not to over-complicate the plan.  The KISS rule most definitely applies to sales compensation design.  Try to limit your weighted elements to no more than 4, with no more than 1 modifier or qualifier on the most important elements, and no less than 20% weight per element.

5.  Develop the plan mechanics, including optimum pay frequency.  Once you have your elements selected and weighted, you need to figure out how you are going to calculate pay (mechanics) and how often you are going to deliver pay (frequency).  There are two fundamental approaches to calculating incentive compensation, and the terms used to describe them are widely misused and misunderstood.  They are “commission” and “goal-based bonus.”  When you are talking about a sophisticated incentive plan design, these terms mean something very specific.  A commission is a way to deliver incentive pay that pays a piece of the action, such as a % of gross margin or % of revenue.  Commission-based plans pay based on volume alone – those who sell more make more.  The other end of the spectrum is a goal-based bonus based plan, which pays for goal attainment.  A goal-based bonus is not subjective or arbitrary, but instead is tied to attainment of a pre-defined goal.  (We strongly discourage the use subjective bonuses, by the way).  If Sally has annual volume of $500,000 and Joe has annual volume of $250,000, then under a commission-based plan Sally will make 2x a much as Joe.  However, many managers will understand that perhaps Sally has 2x the volume because she has been given house accounts or contracted business, or something that makes it unfair for her to earn 2x as much as Joe (who may be working his fanny off building a new line of business or breaking into new lanes).  In this case a goal-based bonus plan would level the playing field.  Under a goal-based plan, Sally would earn the same amount at 100% of her assigned goal as Joe would earn at 100% of his assigned goal.  Yes, if you were to calculate the rate (pay divided by volume), they would have different payout rates, but by structuring the plan this way you are acknowledging that some business is harder to get than others, and paying accordingly.  You can also combine the two approaches and use a goal-based commission, whereby the rate paid below goal is less than the rate paid above goal. A good rule of thumb is that a commission approach will work if everyone is starting from the same place and has the same opportunity (this doesn’t mean a commission is the right approach, just that it is a reasonable alternative to consider).  If there are inherent differences in assigned accounts, in ability, or in support, then you might want to consider integrating a goal-based bonus approach.

One of the nice things about using multiple elements in a plan design, is each element can have a different pay frequency.  In the example above, you may choose to pay the first element monthly, the second element quarterly, and the third element annually.  The main considerations for pay frequency are alignment with business cycle and amount of pay delivered.  If the annual target for an element is $1,200 then you probably don’t want to pay monthly as the amount after tax would hardly be enough to go out to dinner.  You want to be sure the check received will be meaningful.

6.  Develop a thorough and comprehensive implementation plan.  You don’t want to go through all the trouble of developing a great incentive plan only to have no  one understand it, so be sure to allow plenty of time to communicate (over and over) the new plan design.  These steps show a typical communication plan:

1.  High level power point presentation to the managers (review their plan first, and then explain their staff’s plan)

2.  High level communication to the staff as a group (one off communications only lead to misinformation).  Ask them questions and have them reiterate key parts of the plan back to you. 

3.  Provide plan documents (see my article in the March Logistics Journal for more info on plan docs), so they have the full legal wording necessary to understand and abide by the plan rules.  Give them a chance to ask questions in a one-on-one setting.

4.  Give them quota or goal sheets which show how much pay is earned at different levels of performance.

5.  Track their performance throughout the pay period, there should be no surprises.

6.  Give them individual performance reports to go along with their incentive checks so they understand exactly why their pay was what it was.

These steps for plan design are the outline, but it is only a starter map, as the combinations of elements and mechanical design choices are truly limitless, which is what makes designing plans so much fun and why there is truly no correct answer to the question “what is the right plan design for a broker in the 3PL industry.” The only right answer is the one that is right for you.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com For a free 20 minute consultation about your specific compensation challenges, submit a request at www.cygnalgroup.com/logistics.  Beth will respond on a first come basis to the first 10 inquiries.

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

By Beth Carroll, The Cygnal Group

I often tell my clients that the good news about incentives is they work…but the bad news about incentives is…you guessed it, they work. What this means is 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.

There are many books written on the topic of sales compensation and most of them are long, technical, and have examples that are not especially relevant to the logistics industry. In this two part article you will learn the basics necessary for developing well-thought out incentive plans for logistics companies. There are six high level task categories for incentive design, and they should be tackled in this order (it is easy to get the cart before the horse, and start talking about pay frequency or commission versus bonus BEFORE you’ve even established your business objectives, but this can lead to confusion and yelling among the design team members, so it’s best if you just take it one step at a time):

1. Define your business objectives & sales strategy
2. Define your selling roles and determine incentive plan eligibility
3. Establish total compensation, pay mix & leverage for each role
4. Determine the appropriate performance measures & weights
5. Develop the plan mechanics, including optimum pay frequency, and
6. Develop a thorough and comprehensive implementation plan.

I will discuss the first three in this article. Steps 4 through 6 will be in next months’ Logistics Journal.

1. Define your business objectives and sales strategy. You don’t start off on a trip with no idea where you are headed, nor should you develop an incentive plan without an idea of what you want it to accomplish. An incentive plan is a powerful tool that should accomplish far more than simply delivering pay to your people. Spend some time with your leadership group developing a clear business plan, with defined objectives, and then figure out the appropriate sales strategy to help you accomplish these objectives. For some logistics companies this may be targeting large contracted business relationships, whereas for others is may be maximizing volume on low margin commodity freight. The sales strategy for these two extremes is of course, quite different, and would require a different skill set (and incentive plan) for the types of reps going after the business.

2. Define your selling roles and determine incentive plan eligibility. Once you have your sales strategy defined, you need to determine what roles will best support this strategy. What are the characteristics of these roles – are they primarily hunters or farmers? Are they selling transactionally where they are providing a low cost solution to a customer who wants minimal hassles or are they selling consultatively where they are crafting a custom solution to suit a particular business need? The transactional hunter has a very different profile (typical van freight broker) than the consultative farmer (the account manager for a multi-million dollar outsourced logistics contract) and they should not have the same incentive plan. You may have a large game hunter who finds the multi-million dollar account but who then hands it to the account manager to grow and develop. These also are different roles. One of the most frustrating things for sales people is to not have a clear understanding of what their role is and what is expected of them, so this is an absolutely crucial step in the process of developing incentive plans. As for eligibility, a common mistake in logistics companies is to attempt to develop incentive plans for everyone in the organization. Customized incentive plans are a powerful tool that must be carefully managed. They take money, time, and effort to get them right. I’ve seen too many companies burn too much of each in an attempt to develop and calculate customized incentives for all of their people. Customized incentives should be used only for roles that have a direct and measurable impact on business results. If you find yourself trying to pay someone for accomplishment of something that really doesn’t impact the bottom line – stop! If you find yourself trying to pay someone for something they have no direct impact on or which is not measurable – stop! Customized incentives should be used for these types of roles in logistics: broker, assistant broker, dispatcher, load coordinator, driver or carrier manager, sales or branch or terminal manager, team leader, operations manager, outside and inside sales rep, and account manager. Generally, with few exceptions, other roles should be on a corporate plan which payouts out annually based on overall company results.

3. Establish total compensation, pay mix and leverage for each role. Here’s where the TIA survey comes in very handy. By matching your defined roles to the roles in the survey, you can determine how much (salary plus incentives) you should be paying at 100 percent performance. Some companies establish a philosophy of market 50th for base salary, but market 75th for total compensation. This strategy would help attract and retain top performers. Your business objectives should help inform your compensation philosophy. Pay mix is the amount of pay coming from salary, and the amount of pay coming from incentives as a percent of total compensation. A 50/50 pay mix means equal amounts come from salary as from incentives. For most farmer-type roles, the pay mix should be skewed more toward base salary (70/30 or 80/20, for example), whereas most hunter-type roles should be skewed more toward incentives (40/60 or 50/50, for example). While role plays an important part in this decision, so does company philosophy. Some companies are by nature more aggressive than others, while some are more team oriented. More aggressive means more emphasis on incentive pay. More team oriented means more emphasis on base salary.

Leverage is the amount of upside. It’s what happens when someone does a really good job. Typically you want there to be more upside the more pay is at risk. As a general rule of thumb, plans with 80/20 pay mixes have 2.0 leverage (2 times the target incentive is earned for a really good job), whereas 50/50 pay mix plans may have 3.0 leverage (3x the target incentive is earned for a really good job). These are not hard and fast rules, but guidelines. What’s most important is relativity within your company. If your 80/20 plans have 1.5 time leverage, then maybe your 50/50 plans will only be 2.5 times. Lack of leverage is the NUMBER ONE mistake being made by logistics companies. If you use a straight commission, by definition there is no leverage. Someone must double their volume to double their pay. This is next to impossible. Likewise, any quota bonus plan that pays 101 percent of incentive at 101 percent performance is doing the exact same thing, and it’s incorrect. The ratio should increase above 100 percent performance to 1.5, 2.0 or greater multiples, so that for example, 103 percent of incentive is paid out at 101 percent of performance. But be careful – you can’t continue this forever. You will need to decelerate the payout curve at some point above goal or you could end up paying out far more in incentives than you ever intended.

Next month we’ll tackle the more technical aspects of plan design: selecting performance measures and giving them weights, developing mechanics (commission versus quota bonus, tiers or linear, quota-based commission, etc.) and setting payout frequencies (monthly, quarterly, annually – and how these can be different for different parts of the plan) and developing a thorough implementation plan so your people understand their plan and can make positive changes to better your results and their pay.

Beth Carroll is a Principal with The Cygnal Group and can be reached at 815-485-4711 or beth.carroll@cygnalgroup.com

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

by Beth Carroll, The Cygnal Group

The joke goes that the majority of incentive plans are drawn up by the company president and sales director hastily over cocktails and written on a napkin.  While most incentive compensation plans have a bit more thought put into them than this, there is a kernel of true beneath the folk-lore, and the place this is most often evident is in the plan document — the piece of paper which is given to the employees to explain how they are going to be paid.

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, a well-written plan document must have the following components:

1. Plan Overview: This part describes the plan objectives, tells who is eligible, gives the time frame the plan will be effective, tells what the target incentive amount is at 100 percent performance, and lays out the various elements of the plan, their weights, their pay frequency and calculation timing, and their performance period.
2. Element Details: This section thoroughly explains each plan element or component, and details the method used to calculate results (e.g., “Gross Margin is calculated by subtracting the cost of purchased transportation services from the customer payment excluding adjustments for discounts and fuel surcharges”).  Wording must be precise to prevent misunderstanding.  Include commission rates, commission tables, bonus payout tables, or any other information that will enable employees to quickly and easily calculate their incentive payments.  Be sure to also document any qualifiers that must be met before pay will be earned (e.g., “minimum gross margin percent must be 10 percent to earn incentives under this measure”). If modifiers are part of the plan, include them in the plan document at this point as well (e.g., “if your on-time  percent falls below acceptable levels, your incentive for the performance period will be reduced by 50 percent”).  Include information about any quotas that will be used to determine pay, and provide a calculation example so the employees can follow it step-by-step.
3. Plan Policies and Practices: This is the very important legal disclaimer section that is often completely omitted.  Things to include in this section are policies about payment when an employee transfers, is on leave, or is terminated.  Preparing this plan document section will force you to think about how you would handle incentive payouts in each of these cases before they happen which could save you a lot of money after they happen.  Also be clear about when incentives are earned. Are they earned when a load ships, is delivered, is invoiced, or is when it is paid?  If an employee terminates and a load that shipped while the employee was active is paid after termination, will that employee still be entitled to a commission on that load?  Check with your lawyer on this, as local laws governing commissions vary.

Also include disclaimers that the incentive plan is not a guarantee of employment, that management has the right to modify the plan at any time and for any reason, with or without notice, and that management may adjust sales credit and/or payout in its sole discretion to preserve fairness to the company and the employee.

Credit splitting and adjustments must be clearly outlined either here or under the pertinent Element Details section.  If you have not documented your policies in these two areas, now is an excellent time.  Consider the situation if two parties work the same load, handle the same customer, cover for each other when one is on vacation or out to lunch, etc.  Also, what happens if there is a major adjustment after you’ve already paid the incentive? What about bad-debt write-offs?  Is there a cut-off point beyond which a load will no-longer be eligible for incentives (e.g., must be paid within 60, 90, 120 days)?  The list goes on.

If there is any possibility of collusion or kick-backs, either between your staff and customers or carriers, or among your staff, be sure to include a clause that such behavior will result in immediate termination.  Include a confidentiality clause, and a funding clause that allows management the right to suspend payment on the plan if overall business conditions are unfavorable (although we recommend using this clause as a last resort only; if it is invoked for reasons other than impending insolvency, then you have a disincentive plan rather than an incentive plan).

Finally, review the whole Plan Policies and Practices section to be sure your intentions are accurately and unambiguously stated; if you do not state your intentions clearly, your ex-employee will likely make an interpretation in his/her favor, and this could land you in court.

Once your plan document accurately reflects your intentions to the best of your ability, have it reviewed by your legal counsel. It will be seen in many jurisdictions as a contract, and is worthy of a legal review. While your lawyer’s contribution is important, you may want to consider reminding him or her that this is supposed to be a motivating and exciting document, understandable by the eligible employee, and confining the “legalese” to the final section to the extent possible.

The thought required to develop each of these sections will result in better plan designs, will prevent costly challenges, and will help ensure your employees understand how they will be paid under the plan. A well-written plan document will help ensure your well-designed plans focus sales effort on the results your business needs.

For a free plan document template to get you started, go to www.cygnalgroup.com/logistics and provide your name and email address in the contact box and we will email you a template within 1 business day.

Reprinted with the permission of Transportation Intermediaries Association and the Logistics Journal.

• The sales job isn’t really done until the cash is collected – this is true when collection is often the responsibility of the sales person
• The company is earlier stage with limited cash reserves and needs the cash in the bank in order to pay the sale people
• Sales people are selling contracts for a rate ($/hour, $/square foot) rather than a fixed price contract, so the real value is not known until the product or service is used and billed.

Others who credit and pay when an order is booked do so because acquiring new business is the primary sales accountability, and there are others in place to deliver and collect, and the situations listed above are not top priorities for these businesses as compared to focusing their sales talent on new business acquisition.

And sometimes it becomes necessary to move from paying at booking to paying when cash is collected. In this case, the business may have to eventually deal with the problem that the lag created by the new sales crediting policy will mean a permanent loss of income for the sales people. (This might be recouped at the very end of their employment IF they continue to be paid them after they have terminated for deals sold while they were employed. But many companies would not plan to continue the payments after termination. And either way, that’s a potentially long time from now.)

Some companies making such a transition will offer a bridge payment to cover the transition; others may expect the sales person to absorb the loss; and of courser there’s the third option of sharing it. If we look at it purely from the company’s point of view, the current year cash outlay to offer the bridge (maybe 80% of expected commissions for the average lag time between booking and cash, paid out during the transition months) would not add any cost vs. the expected cost of the old (pay at bookings) plan. And if the comp plan doesn’t pay after people leave, then it all comes out even in the end, roughly. That’s probably the humane approach, and most likely to keep the sales people focused and productive during this transition (which they will not like, however you do it).