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

This is a topic on which sales leaders and finance people have strong opinions. While I’ll discuss some of the nuances around the topic below, my bottom line is that most people should achieve or exceed quota.

To be more specific, more than half of the people should hit or exceed their goal. This would be clear evidence of a “achievable quotas.” While it may be difficult to tell at the start of the measurement period whether or not assigned quotas are truly achievable, it is not at all difficult to tell by the end of the measurement period — if most people achieved the quotas, then they were achievable; if not, then they weren’t.

Why do attainable quotas matter?

1. Motivation. Most people, and even more sales people, want to be “successful.” The quota is the performance standard. People who don’t get there are underperforming, and people who get to quota are performing well, and people who exceed their quota are over performing. The opportunity to be successful, and to be seen as successful, and to enjoy the fruits of success (good variable pay) — these are powerful motivators. Quotas which are out of reach for most people create at least as much frustration as motivation.
2. Management credibility. Attainable quotas are a sign that the company and sales leaders understand their market, their value proposition, and their selling model. Territories are balanced, sales resources are appropriately deployed, and a reliable selling system is in place so that the relationship between sales capacity and sales results is a stable. Sales people like to be part of such a system, customers like to be served by such a system, investors like to invest in such a system. Attainable quotas are a clear sign that this sort of value-creating selling process is in place.
3. Delivering market-competitive pay. Most companies intend to pay their sales people at a level which is competitive for the market. If the combination of base pay plus the incentive that target (at quota) is set so that it will deliver market-competitive pay, then if most of the sales organization does not achieve their quotas you will have most of the sales organization not earning market-competitive pay. Some companies mitigate this risk communicating above-market pay in anticipation of under-performance versus quotas, hoping to actually deliver market-competitive pay median performer. However, you can imagine how assumption-filled the analysis is which connects expected total compensation to market values.
4. Budgeting and performance prediction. For the purpose of predicting the performance of the sales organization and the cost of their compensation, the most straight-forward approach would be based on assuming that average quota attainment is 100% of quota average target incentive earned is a bit more (usually 5% to 12% depending on the amount of acceleration in the comp plan). Trying to predict total sales productivity and the cost of compensation in a business in which quotas are generally not attained can become an exercise guessing, gamesmanship, and frustration for all involved.

This is all about quota — what about the rest of the performance distribution?

If the objective is to maximize the motivational value of the comp plans, the ideal performance distribution is:

• Not more than 5% of the sales people “out of the money” (earning no variable pay), and the these people should generally not be “keepers”
• About 40% of the sales people earning some variable pay, but less than the target amount
• About 45% of the sales people earning more than the target amount, but less than the fully leveraged upside (fully leveraged upside is generally 2 to 3 times the target incentive)
• About 10% of the sales people earning the fully leveraged upside or more.

1. A performance standard (some say quota, others say productivity expectation or goal) and
2. A good tracking and reporting system (have to keep up with it if we’re going to pay on it).

And I honestly think you could get a lot of traction just by doing those two things well. Add in the reward and you’ve definitely covered a lot of the triggers that help maintain focus and motivation.

A reward system can go awry if the rewards (and risks) are so great that people get a little too “creative” in meeting or exceeding their goals, or if they are so small as to seem to undervalue the contribution they are meant to reward. The first case (inappropriately large incentives) is much of the root cause of the current backlash against incentive pay, in my view.

Interesting idea, and we do have a client that is violently opposed to quotas as providing a “stopping place.” I suspect it may be a case of bad comp design + a flawed quota setting process. If there’s a big payout AT quota, then yes – it’s a stopping place. But if the reward for getting to quota is the opportunity to earn at an accelerated rate, then no rational sales person would hold back at that point, unless…

…unless the goal setting system will result in a much larger (and harder to attain) quota the next year as the “reward” for over-achievement. And that, in my experience, is the real reason for the quota becoming a “stopping place.”

So I’d say that attainable and fair quotas set using a process that does not punish success with added risk the next year, combined with correct comp design, will yield the best return on the cost of comp for the company in most cases.

1. Used for the benefit of the employee (not just to create benefits for the employer)
2. Focused on challenging activities (not on activities that employee sales people already like to do)
3. Tied to specific reasonable, objective, and attainable standards of performance
4. Accompanied by celebration of significant successes by the organization.

In addition they note that, “Reward systems that are discretionary, subjective, or based on pleasing the people in charge are often seen as unfair and coercive. What is ‘good’ today may not be good enough to earn a reward tomorrow.”

There is substantial written work questioning the effectiveness of incentives in creating sustainable healthy motivation. This book takes this question on, focusing mostly on the education and compensation application of the principles.

1. They may take more time and effort on the part of the sales person, so should pay more as a percent of sales to make them worth that time investment
2. They may pull sales people out of a comfort zone, and so should be more attractive to help them focus on new behaviors
3. They may be more difficult from a goal/quota setting point of view, with little/no history to use as a basis, and so goals/productivity expectations may have serious accuracy challenges compared to the base business.

Here are the typical comp mechanics to recognize these challenges:

Characteristic of the sale: Takes more effort

Comp mechanics: Pay a slightly higher rate – 15% to 50% more than base business is about right, depending on the degree of difficulty

If the “more effort” is only a startup challenge, make it clear that in the future it will revert to a lower rate – so they have every incentive to get these sales going quickly (for new products); if it will always take more effort, the rate should probably not revert (new customers)

Characteristic of the sale: New / out of comfort zone

Comp mechanics: Pay a higher rate on the new stuff and a lower rate on the old stuff – to provide “carrots” and “sticks” – so ignoring the new stuff would mean less earnings than last year for the same results as last year; and meeting expectations on both old and new would result in slightly higher earnings

Again, make it clear that rates will not stay this high on the new stuff forever, so it will be in the sales person’s best interest to get a fast start

Characteristic of the sale: Difficult to set goals

Comp mechanics: Pay on the new stuff (products/customers) from first dollar, without a lot of dramatic acceleration or bonuses around quota/productivity expectation. If you know your goals are rough, don’t make attainment of them a high-stakes event for the company or the sales person. In fact, a straight commission (at an attractive rate) without any acceleration is a reasonable arrangement in the first year.

Question

In the non-commercial radio world, there is a role that is referred to as underwriting staff. They go out and solicit contributions from businesses for a mention on the air. It is basically sales in the non-profit broadcasting business. One station’s staff has always been salaried and now they are thinking of going to a commission structure.

Answer

My advice is to offer some variable pay, but move slowly. My guess is that you want a collaborative non-profit approach by your “underwriting staff,” not an aggressive sales-y approach. Their degree of aggressiveness and their level of effort may go up as you offer them incentives; but your ability to control them and their tendency to work collaboratively with their team and the rest of the company may go down. You also need to assume that you have people already in the role who chose it because they liked the reliable low-risk pay environment. Too much at-risk, and you could scare them away – which is OK if that’s what you want to do, and if you have the ability to re-fill those positions quickly.

So, that said, I would suggest that you move to a fixed dollar payout opportunity at target – same value for all of them – we’ll call that their bonus. Then set a goal in “underwriting” that they have to achieve to get it. Start paying some variable pay around 70% of goal (since it’s the first time you’ve set these goals), and offer 150% of the target at around 130% of goal. The payout should probably not be funded by reducing base salaries in the first year you do this, as that could also be scary. If you are already paying below market, you may have room to offer a bonus by paying a little more in total and putting the entire annual increase into the bonus. Even $5,000 in the first year will start to get things going and capture their attention. $10,000 would be better. And over the long run you are probably headed towards a pay mix that is about 60% to 70% base and 40% to 30% at-risk.