Global organizations need structure. Local businesses need to focus their sales team on local priorities. How can these apparently conflicting needs be balanced? No talking on this one, but some good ideas!

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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 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.

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 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.

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

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

By Beth Carroll, The Cygnal Group

What’s wrong with the traditional, “highly variable, straight commission on margin” approach for paying your employees? Nothing…if every employee has the same opportunity, the same skills, the same training, and all your freight is from the spot market where each day is a new day and no one knows for sure what’s coming their way.

However, as this industry matures, many transportation brokers are learning that the traditional approach is no longer working for them. This is especially true in organizations with substantial business from contracted or long-standing “house” accounts or those experimenting with non-traditional organization structures (such as using strategic account managers, strengthening the use of outside selling roles, and/or splitting their organization between teams of “freight finders” and “truck finders”, who may or may not be tied together in shared dependency).

The challenge that arises in these situations is to determine what is “fair”. If you use a highly variable plan delivered via a flat commission rate, is it fair to pay an employee the standard commission rate for moving freight for a large contracted account they didn’t land? What about for freight that is generated by an outside sales person – shouldn’t there be a reduced rate on these loads when it comes to paying the truck finder? What about if you are using a team approach that generates a shared pool, but now you need to add people to the team? Or you need to move your best team leader to another group that is substantially smaller because you know he/she will be able to grow it? It each case, if you stay wedded to using a highly variable commission-only approach, you will find yourself creating “special deals” where certain accounts are paid a lower (or higher) rate than others, where you are administering cumbersome calculations to deduct the “lead generation” fee before calculating the commission, and where you are creating temporary “deals” with employees as you re-organize your staff or your accounts. You may find yourself spending more time trying to remember the different compensation arrangements you have for Joe, Sally and Fred and what the rates are for accounts A, B and C than you are spending building your relationships with your customers.

Using the traditional highly-variable straight-commission approach for incentive compensation is appealing on many levels: it’s simple, easy to understand, it’s economically “pure” so you don’t have to worry that you’re going to spend all your profits on incentives, and it’s easy to administer (at least at first). For busy business leaders, this approach feels like it should be a “fix it and forget it” solution. In addition to these benefits, the commission mechanic (regardless of how much pay is at risk in the plan) is a powerful tool that creates an intensity of focus you generally don’t find with other compensation mechanics. For these reasons, using a highly variable pay plan, with a commission mechanic to calculate pay, is perfectly appropriate for some selling roles and in some selling situations, especially pure new business hunters in start-up companies or high growth divisions of established companies. These types of roles have what is called “high prominence” – which means, in plain language, that they have a high degree of control over the outcome of their sales efforts. (I would still suggest using an escalating or de-escalating commission mechanic for even these roles, however, as it’s rarely appropriate or advisable to base an entire incentive plan on a single, unchanging commission rate.)

Where the traditional highly-variable commission-based approach does NOT makes sense, however, is for companies that have developed a substantial book of regular business, are building strong brand awareness in the marketplace, and are using multiple internal resources to land and grow accounts. In these cases, most of the employees are “less prominent” in the sales process; they are a cog in a much larger wheel that includes marketing and advertising campaigns, outside sales resources, and long-standing company relationships with customers. Using the traditional approach can hinder management from making the right changes for their business (shifting customers or load volume around) because it would be “taking pay” away from one employee and “giving it” to another. In these circumstances, the better approach is to shift your pay mix more toward base salary (at least 50/50), and make at least part of the incentive plan dependent upon the attainment of defined goals.

What is a Goal-Based Incentive Mechanic (aka “Bonus”)?
Commissions pay for volume (“the more you sell, the more you make”). Goal-based bonuses pay for attainment of a pre-defined goal (“if you beat your goal, you make more money”). Using goal-based incentive mechanics can provide more flexibility for managers to run their business to meet customer needs, target strategic objectives beyond gross margin, and manage employee pay as a motivational tool.

An example might help illustrate the difference.

Joe, who has been given a large volume of mainly long standing accounts, generates $30,000 in a given month in margin. This is down 25% from what he did the last month.

Sally, who is still developing her book of accounts, generates $15,000 this month, which represents 150% growth over what she did the last month.

A pure commission mechanic would pay Joe twice as much as Sally, even though his business is shrinking and hers is growing. Arguably, Sally is doing a better job than Joe, even though, and I can hear many of you saying it, “Joe is still bringing more money into the company.” Yes, he is. But, once a company grows beyond the point of living hand-to-mouth in start-up mode, management needs to think strategically in terms of what behaviors and results should be rewarded for the long-term growth of the company. Sally could very well be a better long-term asset, but she may not stay around too much longer if her pay is below market competitive levels (and also very likely perceived by her as being “not fair” compared to what “that slouch, Joe” is making).

Using a pure bonus mechanic, Joe might be given a monthly goal of $35,000 per month in margin, and Sally given a goal of $12,500. Management would make this determination based on previous period performance, opportunities for growth, and the overall numbers which must be hit by the organization. At 100% of goal, each would make $1,000 for the month. A well-designed goal-based plan has a range around goal (called a performance range) which allows for payout both below and above goal, with different escalation rates. At $30,000, Joe would be at 85% ($30,000 / $35,000) of his goal, and he might be paid 77.5% of his target incentive or $775. At $15,000, Sally would be at 120% ($15,000 / $12,500) of her goal, and she might be paid 140% of her target incentive or $1,400. This provides a payout that is determined by the individual’s ability to meet and exceed the goal that management has set for him/her. Next month, when management decides that Sally might do a better job managing one of Joe’s accounts, Joe’s goal would be reduced and Sally’s would be increased, to reflect this shift in accounts. Each of their incentive targets would still be $1,000 for 100% of goal attainment. Management can make this decision purely based on what is in the best interest of the customer and the company, without fear that this kind of change is taking pay from Joe and “giving it” to Sally. Instead, the discussion is entirely about who is best suited to manage and grow this particular account.

For those of you who may feel that the pure goal-based approach is not quite right for your business, or it’s too much change to take in one step, there is the comforting fact that there are millions of different ways to design incentive plans. One of these options is to use a goal-based commission, where the commission rate increases when the individual’s goal is attained. This provides a blend of reward for volume and reward for goal-attainment. Another option is to divide the incentive into two (or three) elements, one of which is paid using a commission mechanic, and the other of which is paid using a goal-based mechanic. Some companies elect to transition by using the goal-based mechanic on a lesser-weighted team measure, and the commission mechanic on a more heavily weighted individual measure. The possibilities are truly endless, and companies that are moving beyond the traditional broker method for compensating their employees are finding the answers to some of their most vexing compensation problems.

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

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Business need: Profitable business

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Business need: Growth in sales of new/strategic products/services, or targeted customer types (e.g., new customers or customers in specific industries)

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Business need: Sales over goal/quota

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Business need: Consistent sales performance

Finally, with all these measurement possibilities and linkages on display, we feel compelled to caution you that, when it comes to sales compensation plan design,

Simpler Is Better. Be careful. No Gratuitous Complexity.

Only include these types of components in support of strategic imperatives for the business. And remember that you only really get to "say" about three things with your compensation plan and be "heard." Just because you can, that doesn’t mean you should.

It is totally appropriate and makes sense to pay two people for a sale in either of the following situations:

1. It takes both to get it sold (for example: the field person secures the contract then the inside person follows up to ensure units are purchased and deployed; or the inside person identifies opportunities and makes appointments, and the field person shows up to demonstrate the product and close the sale).
2. Some opportunities need only one team member or the other, and others need both, and you want the team to work out the most efficient way to get the most sales between them without any penalty to either.

In contrast, individual measures and credit to only one person for each deal makes the most sense when the customer base can be stratified so that one set of customers is totally covered by Inside, and another by the Field. Most often this is done based on the size of the customer. This arrangement allows very clear accountability for success and simple crediting and compensation calculation. When it is not used, it is generally because the teamed selling approach is deemed to be a more efficient one.

If there is shared credit for each sale, the key to ensuring that the right selling focus occurs at the right cost of comp for the company is to set the rates so that appropriate total pay is delivered to each person when the TEAM makes their goal. For example, if the company intends to spend 10% of margin on sales compensation, it could be spent as 4% to Inside / 6% to Field, with both are paid for all sales. This has to also work in the context of the expected productivity of the teams, and the market value of their jobs.

One other common challenge with this occurs when the team members feel that their earnings opportunity is negatively affected by the level of competence of their partner. So if an Inside person is paired with a new or less productive Outside partner, the Outside partner’s lack of productivity is likely to adversely affect the compensation of the Inside person. This will often drive organizations to expand team size or revert to separate quotas and sales credit.

Question

Do companies achieve secondary goals like introducing new products or improving the product mix or the average unit price through comp plans? Is it advisable to pursue more than the number one goal of rewarding sales?

Answer

Most sales compensation plans include more than one objective. In a selling environment with any complexity at all, one objective rarely covers all of “the most important things.” Some sales are more valuable than others. These more valuable sales may be literally more profitable (better margin products), or strategically important (solidifies a longer-term relationship with the company), etc.

While I am a passionate advocate for simplicity in sales plan design, most of the plans I have helped to create include more than one component. Examples are:

• Revenue on legacy products, revenue on new products
• Existing customer sales, new customer sales
• First year contract value, out-year contract value
• Sales value (e.g., dollars), margin value (e.g., dollars)
• Individual sales, total team sales
• Bookings, recognized revenue.

Two measures in a comp plan doesn’t worry me – it probably means the comp plan accurately reflects the sales priorities. Three measures may be warranted as well. Four measures can sometimes be justified, but usually is not a good idea. Five measures is more than I can recommend.

You can “say” all you want to in a comp plan, but only about three things can be “heard.” So three measures is a good maximum, and fewer is better as long as you don’t over-simplify the business priorities.

Question

I’m looking for ideas in revamping our sales comp to include metrics and pay for items other than just meeting a traditional sales quota. Perhaps a bonus for a close rate of XYZ, for example. Any ideas are welcome!

Answer

Our counsel is generally to pay for results, financially measurable results (as opposed to activities). Sales compensation, to be really motivating, generally involves significant cash and upside — and you want to be sure that those payouts are rewarding sales people for results that more than cover the money to be paid.

With that said, other great measures besides just sales/bookings/revenue generally have to do with the quality of the sales dollar. Some sales dollars may be more valuable to your company than others — like sales of more profitable products or services, or sales of strategically important new products, or sales into an important targeted industry segment. Also, sales over goal are generally more lucrative for the sales person than those below goal. And consistent sales performance is often valued over sporadic sales performance. These are just a few of many alternatives to just paying on sales. But picking the right one is all about aligning the rewards with what is most important to the success of the business.

1. Be clear on how much and for what measures the managers involved can “move the needle,” with a direct effect on the company’s financial results. Product Managers could be measured on product line gross margin or operating income, with a similar measure for Program Managers, for example. But make sure the measurement and reporting systems will support robust measurement of their results.
2. Be sure you have enough incentive to actually motivate and drive behavior towards the results you want. Anything less than about 15% of target cash compensation may not be worth the cost of designing, reporting and administering the plans (in terms of the effect on results). This can be tricky if you are offering incentives for the first time as you probably don’t want to reduce base to fund them. If you can redeploy budgeted money from a broad-based employee incentive plan to help fund it, you can bring the pay mix in line over time through reducing the increases in base and putting them towards the variable portion.
3. Be careful with target setting. You need to aim for about 60% of your employees on variable pay plans to be at or above target, or it won’t motivate much.
4. Offer enough upside. If you are putting people in an at-risk pay situation, possibly for the first time, you need to be sure a few people really ring the bell and get a handsome payout (1.5-2.0 times the target incentive), and publicize and celebrate these successes — it helps motivate everyone.
5. Be sure the people in the role have the risk profile to find this motivating (or that that is the sort of person you want in the role, and are willing to make the needed adjustments). Not all solid employees are “coin operated.”

A. Run the sales team under the direction of company leadership with a focus on keeping the sales team recruited, coached, and productive

B. Work as a member of the company’s leadership team to set the company strategy, determine how best to address the market for the company’s offerings, and deliver both the needed growth and company financial results.

If most of the time and effort are focused on A. then it’s a sales type plan. If both, then consider a 50/50 sales-type plan and company executive plan. And it’s rarely mostly B. unless there’s an EVP of Sales & Marketing with a VP Sales reporting in, but if this is the case, then a purely executive type plan could be appropriate.

The right measure(s):

The ideal measure for this type of business is the margin on the deal. Margin rewards sales people for selling profitable business. However, very few companies use this as it is hard to agree on the deal margin, and if cost overruns are frequent you can end up with sales people “helping” you manage the cost side of profitability rather than the price and value side. For these reasons, most use deal value, either total contract value (often abbreviated TCV) or annual contract value (ACV) to measure sales productivity. And generally you do want to pay more for larger deals, which would argue for a payout rate table (typically communicated as a commission). The actual amount of the payout per deal is a function of how much compensation you intend to deliver for at-goal performance and how big the goal is (comp / goal = rate).

Sales credit trigger (timing):

The principle here is that you want to finish paying the sales person for a deal at the point at which you want them to disengage and move on to focus on the next opportunity. So if you just want closed deals, you’d pay after signing. If you want closed deals with nurturing and attention through initial implementation, you might pay 50% at signing and 50% after the first check comes in for under-way monthly service. If you want the sales person staying in touch, finding ways to grow the relationship, etc., then you could pay some (20-25%?) at signing, and the rest over the life of the contract based on recognized revenue.