3PL Perspectives
I’VE BEEN WORKING with Freight Brokers for over 15 years and in that time, it’s been fascinating to watch this industry mature. Terms that were commonplace in my years as a sales compensation consultant (transactional vs consultative sales, hunter vs farmer, long sales cycle, sales support, subject matter experts, etc.) are starting to make their way into the brokerage vernacular. If you have not read any of Neil Rackham’s books, it may be a good time to have a look as even though his material may be a little old school now, he is considered one of the legends for teaching proper sales strategies for larger, more complex deals.
One of the surprising developments of 2022 is the frequency with which I’ve been asked, “What is the right way to pay customer operations?” Equally surprising is the degree to which the answer to my question, “How do you do it now?” is answered in a nearly identical fashion. Most seem to have simply punted and decided to pay somewhere between 0.5% and 2% of the Gross Margin dollars (GM$) managed by the person or the team, and if a team—then the dollars are usually split in a pool-like fashion. These percentages are sometimes then taken as a deduction from the sales resource as a cost for the support. While on the surface these decisions are logical, they often have unintended and damaging consequences.
Before we get into some alternatives, let’s review a couple more key Sales Comp 101 terms: Cost of Sales vs Cost of Labor. Compensating employees who are involved with revenue/gross margin production can be thought of as being on a spectrum between two extremes; 100% commission plans are pure “Cost of Sales”—you set a commission rate based on what you can afford to “share” from the profits with the sales resource (and what you think will be competitive to attract talent) and then you sit back and hope everyone gets rich; “Cost of Labor” is likely how you think about paying your back-office support staff and usually requires getting market data, so you know what would be a fair amount to pay for a given role and level of experience, based on the labor market—hence Cost of Labor. Contrary to popular belief within this industry, there are many sales organizations in the world that use a Cost of Labor philosophy as the foundation for their sales compensation plans. These range from manufacturing companies to banks to software companies. Software companies often disguise their Cost of Labor approach using a “Personalized Commission Rate” or PCR (target incentive divided by quota = PCR), but don’t let this fool you; they are still talking about Target Total Comp (TTC) or On Target Earnings (OTE) and both of those terms are signs that, at some level, you are speaking in terms of Cost of Labor.
As with most spectrums, there are a host of options that fall between a pure Cost of Sales (100% commission) and a pure Cost of Labor (100% salary at the extreme). Even when you are developing a commission plan, it is wise to consider the labor market to make sure you are not overpaying or underpaying for the talent you need. Commission rates should be derived from TWO perspectives—one is, “What can you afford?” but the other must be, “What do you expect to pay for what level of production?” and the latter part should come from some connection to labor market rates.
For customer operations, this shift in philosophy is what has tripped up many managers as they are either not familiar with how to do Cost of Labor-type incentive plans or, as I am finding far too often, are biased against these plans because of previous exposure to bad designs. So first, let’s clear up some misconceptions. Cost of Labor plans (which may also be called “Goal-Based Incentives”) can be:
- Highly lucrative—they can pay top performers MORE than a straight-line commission
- Paid frequently (monthly if you like, of course!)
- Uncapped
- Tied to individual performance
What they are not is a “fix it and forget it” type of plan, as you need to remain aware of the market and be able to set reasonable goals, expectations, quotas, or targets (be aware that the term you select for goals could have a triggering effect if the same term was used for a prior bad-plan design).
For customer operations roles, you may have a mix of highly sophisticated account managers who are tasked with growing a large book of business and who are largely the sole resource responsible for this customer. You may also have clerical customer support or operational support resources who are doing order entry, appointment setting, track and trace, and maybe even some pre-billing work such as gathering PODs and getting all paperwork set for accounting. These roles are highly instrumental in a brokerage’s success and, if done well, help to reduce the overall “Cost to Serve” which, from my prior article, you know should be around ⅓ of your gross margin.
So, what is wrong with paying them a straight commission on the GM$ they manage? Well, first you could find yourself paying far more than you expected as these people or teams can process a lot more freight than a traditional spot market broker can. It is not unheard of for some Account Managers to manage books of business that are north of $10M a year in GM$. They may be worth every penny of the $200k that a 2% commission would yield for this work (particularly if they have a hand in the strategic growth of the account), or they may not be if the freight is highly automated and they are serving more of a customer support role. The other problem with the Cost of Sales thinking for this role is “the 2% has to come from somewhere,” so it’s taken from the sales rep who could then elect to NOT use customer support when it’s absolutely the right thing to do for the customer, the company, AND the sales rep! In other words, it doesn’t exactly incentivize cooperation within the company.
The answer for many of these roles is to shift from Cost of Sales to Cost of Labor—where the conversation becomes about Target Total Compensation (TTC) or On Target Earnings (OTE), Pay Mix (salary vs. incentive) and Target Incentive Comp (TIC). If you are paying any role in these groups using KPIs or goalattainment metrics that provide a fixed payout such as $500 per month, then you are already using a Cost of Labor approach as their pay is no longer connected to their production through a commission rate. You should scale these tables, so that there is an upside (and downside) as it’s rarely a good idea for incentive payments to be all or nothing. For the big-dog Account Managers you may want to use a full linear goal-based incentive that allows significant upside for growing an account above expectations. This payout could very well exceed what would be provided under a straight commission model as the relationship between goal and pay should not be 1:1 (e.g., 80% of goal should pay less than 80% of the target incentive, but likewise, 120% of goal should pay MORE than 120% of the target incentive); a straight-line commission pays from the first dollar which means you could pay an Account Manager a large sum money while they are SHRINKING the business they are tasked with growing. This obviously creates a counterproductive economic outcome.
There are also many options where goals and commissions can be blended, and for some of these roles (and organizational cultures that are steeped in paying a “piece of the action”) this can be the best possible compromise. In this world, commission rates de-escalate below goal and escalate above goal, but the goal is a flexible number that can be adjusted when accounts are added or taken away from the book. Big books will still pay more than small books, but lack of goal attainment WILL have an adverse impact on final take home pay just as exceeding goal (even for a smaller book) will have a positive impact.2
