3PL Perspectives
Beth Carroll | PROSPERIO GROUP
IN AUGUST WE looked at linear goal-based incentives, and in December we looked at tiered incentives. Linear goal-based incentives are used for things you can measure with a high degree of precision, which have clear, direct monetary value to the company, and which are typically measured at a high level (the thing you are trying to achieve is greater than 100, so measuring in 1% of goal attainment increments “makes sense”). Tiered incentives are used for things that are lumpier in their value—one of them might not be valuable, but 10 of them certainly would be, and/or when the number you are trying to achieve is less than 100. Good linear incentive elements are Gross Profit Dollars (GP$), load count (perhaps), and revenue (perhaps). Tiered incentives work for things like on-time percentage attainment, Gross Profit Percentage (GP%) ranges, average loads per carrier, etc.
But how do you handle non-traditional roles such as accounting, HR, IT, and marketing when it comes to incentive compensation? There are at least three choices:
1) Do nothing. Just pay them their salary and hope they are happy with 2%-3% merit or cost-of-living increases (merit is a better approach than COLA by the way).
2) Provide annual discretionary “profitsharing”bonuses around the holidays. This is not a motivational incentive plan, but simply a thank you and will very quickly likely become an expected part of their compensation package.
3) Develop what I call “non-traditional” incentive compensation plans that can be used for these roles and paid out on a more-frequent-than-annual basis (quarterly or semi-annual is usually best for these roles).
First, let’s be real about what you are going to GET for the dollars (and time) you will be investing in creating incentive plans for these roles. The answer is, frankly, not that much. You may be able to diminish increases in fixed overhead by shifting annual salary increase budgets to annual incentive increases instead, which vary by performance. In doing so, you will certainly make these people feel like they are “part of the team,” which has a value that cannot be quantified. Also, simply by having a performance-based incentive plan you’ll likely to see some increase in productivity and performance. You will learn what is being done well and what needs improvement. This is a laudable goal, to be sure. You will not, however, see massive financial improvement in business bottom-line results simply by adding incentives to your back-office support roles, so be sure you and everyone on your team are clear why you are doing this and what you think you can realistically see as benefit from it. These plans can be more work to track and administer than the plans for sales and operations, so please, go in with open eyes.
In the last few years, I’ve worked on many “whole company” incentive projects and have developed some best practices for which types of designs work best with which group of roles. There are four design constructs to choose from:
1) KPI/IPM
2) MBOs
3) Gainsharing
4) Development Scorecard
The accounting department will most likely use KPI/IPM and MBOs. The IT department may use Gainsharing and/or Development Scorecard. Marketing could use KPI/IPM, MBO, and Development Scorecard. HR is most likely going to use MBOs and Development Scorecards. If you are running an asset operation, groups like Safety and Maintenance are most likely going to be on KPI/IPM type plans.
So, what does all this mean? Let’s go through each type one by one and you will see why one or more work better for some groups than others. This article will focus on the KPI/IPM option as it’s commonly used across a variety of these roles. We will deal with the other choices in future articles.
KPI/IPM
This form of incentive takes an assortment of smaller performance measures and buckets them together into a weighted average scorecard, like the example below for a billing clerk will show:
There are between two and four “components” (the performance measures such as “Average Days to Bill”) and each should be weighted at least 10%. Normally I try to keep this at 20% or higher, but I find that companies often want something in the KPI element that is being tested or is subjective in nature, and so we weight it less, to begin with. The weights must add to 100% and then performance has to be scaled in the green rows. If you define “Meets Minimum,” “Meets Expectations,” and “Meets Excellence,” then the other two levels fill in naturally. The performance value on each component (e.g., Exceeds Expectations equates to 125% value1) is multiplied by the weight of the element and added together for a weighted average total. In the table, the blue X’s represent hypothetical performance. Find the value at the top of the column with the blue X and multiply that by the Relative Weight for that component.
This element has two different uses (and thus, it has two different names). I call it a KPI table when it stands alone in the incentive plan and carries its own weight. This means dollars are allocated to this measure and payout is determined by performance on this measure alone. If the target incentive was $1,000 per quarter for the KPI table, then payout would be $1,280 (128% of the $1,000) based on the hypothetical performance shown by the blue X’s.
It can also be used as an “Individual Performance Modifier” or IPM. In this incarnation, the performance percentage modifies a payout earned on another element—usually a company or team financial element. In this way, if the company does not reach a minimum level of profitably there are no additional payouts for anyone in accounting (or other departments) that use an IPM structure, as 128% of $0 is $0. You would use a linear table (See August 3PL Perspectives) for determining the payout percentage relative to the company goal, multiply this by the target incentive for the role, and then modify this payout up or down based on the IPM result. An example may help.
Let’s say you’ve decided the role in question has a $4,000 a year target incentive amount (very common, by the way, for these types of roles as this often is close to 10% of the salary), and you are going to pay it quarterly, so $1,000 per quarter is the target. You want company profitability and individual performance to be the two elements of the plan.
KPI Option: 50% on Company Performance as Element 1, and 50% in KPI table as Element 2
IPM Option: 100% on Company Performance as Element 1, modified by IPM as Element 2
If the company achieves target performance, and the individual achieves “excellence” across the board on their KPI/IPM table, the payouts under the two options would be as follows:
- KPI Option: $500 paid on company element + $750 paid on KPI (150% of $500 Target) for $1,250 total paid
- IPM Option: $1,000 paid on company element (all the weight is there) x 150% IPM Modifier for $1,500 total paid
If the company achieves target performance but the individual totally flubs their KPI/IPM results and gets 0%, here are the outcomes:
- KPI Option: $500 paid on company element + $0 paid on KPI for $500 total paid
- IPM Option: $1,000 paid on company element x 0% IPM modifier for $0 total paid
The scenario that USUALLY is the deciding factor is this one: If the company portion is not strong enough to warrant a payout, but the individual did well on the IPM, then here are the two outcomes:
- KPI Option: $0 paid on company element + $750 paid on KPI for $750 total paid
- IPM Option: $0 paid on company x 150% IPM performance for $0 total paid
Of course, you can alter the weights between the company portion and the KPI portion (it doesn’t have to be 50/50), and you can adjust the performance results scale in an IPM so that poor individual performance results in a 50% outcome rather than a 0% outcome (you will likely also take down the top end as well).
There are MANY ways to use this table to get the outcome that you want.
One other piece of advice for using KPI/IPM tables. Get the people who will be ON the plan involved in determining the performance ranges. Give them some input into what “good” looks like as this plan is not even remotely about some “economic deal” the way a commission plan is. It’s about the psychological and motivational value you will get by having them be “part of the team” and by measuring their performance on some KPIs against agreed upon standards.
The next article will look at MBOs and Gainsharing, and then the final one in this series will deal with our newest and I think most versatile and exciting incentive construct—the Development Scorecard.
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].
REFERENCE
1You can alter this scale to suit your needs and philosophy. Often times when the table is used as an IPM (modifier), rather than a stand-alone element, then the bottom value is not 0% but 50%, and the top value is something less than 150%
Image credits: PROSPERIO GROUP, DIZAIN/SHUTTERSTOCK.COM, ARIYA J/SHUTTERSTOCK.COM
