3PL Perspectives
Beth Carroll | PROSPERIO GROUP
MY LAST ARTICLE in the August 2020 issue of 3PL Perspectives magazine dealt with linear goal-based incentives. It was pretty intense from a math perspective, so let me back up a minute and talk about WHY you might want to use a goal-based incentive rather than a commission in the first place, as I will certainly agree with anyone who says a goal-based incentive is more complicated. It is. But it can sometimes be the saving grace for a company undergoing rapid change in processes and technology, as without it you may find yourself paying astronomical sums to your reps that are out of proportion with the effort put forth.
For several decades, freight brokers operated with a few key statistics that held remarkably true across companies. Loads per day processed per person ranged from four to 20 for 90% of the brokers in existence, and if a company told you they had 100 employees you could reasonably estimate their revenue was around $100M a year ($1M per head). Also, we expected cost of compensation to be around 1/3 of gross margin (which when combined with a standard 15% Gross Profit Percentage (GP%) meant cost of comp was 5% of revenue, and with the third/third/third model, operating expenses were another 5% of revenue and net income was the remainder). As long as things stayed this constant, it was fairly easy to develop commissionbased incentive plans. If you just ensured your salary + commission worked out to < 30% for all sales and operations roles, you were probably OK. This enabled the use of hefty commission rates, ranging from 5% to 30% depending on how much salary was in play and how the roles were structured (cradle-to-grave or Chicago model or something else).
… TIMES ARE CHANGING, AND I’VE WATCHED PRODUCTION NUMBERS PER HEAD START TO SKYROCKET AS DIFFERENT METHODS ARE BEING USED TO PUSH MORE THROUGHPUT.
However, times are changing, and I’ve watched production numbers per head start to skyrocket as different methods are being used to push more throughput. Some companies are adding or expanding support roles such as customer service which does order entry and appointment setting. Others are expanding the track-and-trace function and/or combining this with customer service. Technology and the greater adoption of EDI transmission methods means more loads are being processed as “no touch” freight and many brokers are looking for ways to maximize the amount of loads processed this way (the cost per load is vastly reduced, of course, when there is no human intervention. The GP% can be smaller, the company can be more competitive, and the whole game shifts to a volume play rather than a high GP$ per load play which was the Holy Grail in prior years). This means, of course, that old compensation methods will no longer work the way they once did. Paying a 30% commission on quadruple or quintuple the volume when there is little to no human interaction simply makes no sense and will destroy the economic gains necessary for this model (and, by the way, not leave enough money left over to pay the salaries of the growing IT department).
Goal-based plans are the path out of this impending mess, and if you’ve not considered how to start shifting to this type of plan, I recommend taking a long, hard look into the future and asking yourself how many “commission reduction” or “overhead charge increase” conversations you are planning to have with your reps. Granted, goal increase conversations are also difficult, but after 23 years of developing and changing sales compensation plans there is an odd truism about human psychology—it’s easier to tell a rep their goal is increasing (provided the increase is sensible and not a knee-jerk 20% each year increase) than it is to tell them their commission rate is decreasing. I’d say the “overhead charge increasing” conversation is somewhere between the two, but still pretty difficult to do too often.
So, with that back-drop, reread the linear incentive article from August and then consider the other options that exist for paying incentives that are beyond commissions. One such addition is a TIERED incentive. For some metrics, such as GP%, it simply would not make sense to use a linear incentive that is paying based on a percentage of goal attained. It gets very complicated to talk about a percentage of goal, when the goal is a percentage. Also, the performance tends to fall into buckets more so than increasing in value for every single percentage of goal attained. Therefore, a little table like this can be very handy for some types of performance measures.
While the payout shown is stated as a percentage of target incentive, for GP% I would more likely recommend using this as a modifier against another element (otherwise you could be paying a lot for one load moved at a high rate!). You could also use this table to provide a “kicker commission” in addition to a flat commission rate. In this case, I probably would not use the portion of the table that is below 15%, unless a lower GP% meant a reduction in the commission rate (also possible). The idea here is that performance within a tier creates a single payout. Under the linear incentive from the August article, every additional percentage of quota attained resulted in more money. Normally I round linear incentive to the whole percentage (2 decimal places) but some companies will interpolate payout all the way out to 4, 5 or 6 decimal places. The tiered incentive (above) is for cases when there is really not that much difference from one point to the next in terms of value—instead you need to bucket or group the results to see a benefit and be willing to provide more money.
Tiered incentives are common for performance metrics, like On-Time Delivery, that you may use for your track-and-trace team, or Revenue Per Mile if you are running assets and need to measure the effectiveness of your Load Planners (see examples), or maybe even number of new customers acquired. The options are endless.
In the next part of this series we will look at MBOs/SSOs and KPIs/IPMs as additional methods that can be used for some of the more challenging roles to develop incentive plans for, such as customer service, track-and-trace, support department roles and senior leaders.
Beth Carroll is the founding partner of Prosperio Group, a business consulting firm that focuses on the strategic management of compensation for global transportation and logistics companies. Beth is based in Chicago, Illinois and has more than 20 years’ experience developing incentive compensation plans for companies across the globe in a variety of industries. Prosperio consultants have completed projects with more than 180 transportation and logistics companies. Beth can be reached at 815-302-1030 or via email at [email protected].
Image credits: ISTOCK.COM/ PETERSCHREIBER.MEDIA, Prosperio Group.
