Part 1 of the Webinar Series on Incentive Comp for the T&L Industry

1. TIA & The Cygnal Group Present
Incentive Compensation
for the Transportation &
p
Logistics Industry
Part 1 –
Role Clarification, Pay Levels and Pay Mix
September 8, 2010
The Cygnal Group has prepared this document for the benefit of the Webinar Participants. This
document is incomplete without the accompanying discussion and contains proprietary material.
This document should not be reproduced, either in total or in part, circulated, or quoted from
without the expressed written permission of our firm.
T H E C Y G N A L G R O U P
Making your numbers . . . better.

2. Incentive Compensation for the
Transportation & Logistics Industry
Part I (today)
 Why use an incentive compensation plan? How can we ensure its success?
 Why do incentive plans become more challenging as companies grow?
 How are companies organizing themselves? Why does role clarity matter?
 Why is it important to set target total compensation and pay mix by role?
Part II (date will be set shortly – watch your emails)
 How does a company decide what to measure and reward for in their incentive plan?
 What
Wh t are the different attributes for each performance measure?
th diff t tt ib t f h f ?
 What math formula (mechanics) should be used to deliver the pay?
 When and how should qualifiers or modifiers be used?
Part III (following part II)
P (f ll i
 What is the best way to test an incentive plan before rolling it out?
 How does a company ensure its employees understand and are motivated by the
incentive plans?
 What are some common mistakes in this industry and what are the solutions?
TH E CYG NAL G RO UP 2

3. Incentive compensation
serves several worthy purposes
Purposes of Incentive Compensation
Communicate Company Expectations
 Clarify key accountabilities for each role (megaphone effect)
 Assign specific productivity targets for each person or role (define expectations)
 Create and reinforce the desired company culture
Support Change
 Move the company to develop a new strength (e.g., new customers, new freight)
 Move away from a negative culture (e.g., complacency, aggression, independence)
y g ( g p y gg p )
Manage Talent
 Attract top performers in each role
 Appropriately reward top performers to ensure retention
 Ensure the cost of compensation is appropriate for the amount of profit, and is
decreasing over time
Manage and Share Risk
g
 Provide additional upside when an individual has a very good year
 Reduce the cost of compensation in years when results are disappointing
TH E CYG NAL G RO UP 3

4. However, companies can destroy the value
of their incentive dollars in many ways
Abdicating management duties to the incentive plan
 Using incentive compensation to “starve out” non-performers
 Not providing feedback to employees; they don’t know how to make more
 Not planning for exceptions in advance (new hires, terminations, etc)
Not coordinating company strategy with the incentive plan
 Sending mixed messages (paying for one thing, but expecting another)
 Linking incentives to subjective evaluation, activities rather than results, and/or
uncontrollable outcomes
Not being thoughtful and careful about plan design
 Changing the incentive plan too frequently and without adequate explanation or
notice
 1x a year is typical, more than that should be done only in emergencies
y yp , y g
 Not modeling incentive payouts under different scenarios to ensure economic
soundness
 This results in too much or too little pay being delivered
 Using hi hl lucrative add-on or SPIFFs for secondary, less important, behaviors, or
U i highly l ti dd SPIFF f d l i t t b h i
to correct a mistake or problem in the core incentive plan
TH E CYG NAL G RO UP 4

5. Before starting an incentive design process,
leadership needs to answer these questions
Why are we doing this?
 What business problem are we trying to solve?
 What is broken that must be fixed?
 Does everyone in the organization agree on “the” problem or are there
multiple problems?
 How will we come to agreement about the p
g prioritization of the p
problems?
 Are all the problems compensation related?
 If not, which of these must be resolved BEFORE changing compensation?
How will we know if we made things better or worse?
g
 A year from now, we expect something to have improved, something
measurable – what is it, and what is the target? Common answers are:
 Revenue or margin growth
 Acquisition of new customers
A i ii f
 Better penetration of existing customers
 Improved margin %
 Improved coordination across teams
 Decreased complacency
 Reduced turnover and/or better ability to hire top talent
TH E CYG NAL G RO UP 5

6. Remember that much of the work you will
be doing is actually change management
Whose buy-in will be needed to change the incentive plans?
 Often this goes beyond the President or CEO to include leaders in:
 Sales  HR
 Operations  IT
 Finance
 Be sure you know what each stakeholder expects, and what their
“yardsticks” f success are as they are l k l to b d ff
“ d k ” for h likely be different.
What will it take to ensure the buy-in of employees?
 Start this work at the beginning of the design process:
 Announce the design project to all affected employees
 Manage expectations about project timing – tell them what will happen when
 Gather suggestions from the staff through interviews with a third-party
 Consider a challenge team meeting with your team leaders
Remember that incentive compensation is about a
lot of things, but motivation is central – and these
g ,
are the people you are trying to motivate
TH E CYG NAL G RO UP 6

7. As Transportation Brokers grow,
their incentive compensation needs change
A
Start-up ($0 - Market Leader
Characteristic Growth ($10m - $100m) B
$10m) A (>$100m)
C
Organization  Flat  More role differentiation  Increased complexity
Structure  Everyone does  Geographic team structure OR  Highly specialized roles,
roles
everything  Account-based team structure including use of highly paid
 Beginnings of freight specialization specialists
may be found (e.g., LTL division)  Account AND Geography may
both be used, as well as
Freight Type
Typical Roles  President (sells)  President All roles found in Growth Phase
Found  Right Hand: Sales  Sales Manager (0-1) (with more headcount) PLUS
Rep or Ops Mgr  Operations Manager (1)  Big Gun Sales (Contracts)
 Truck Finder (1-3)  New Customer Sales (In/Out) (1-2)  Project Managers
 Accountant (PT)  Team/Branch Mgrs (3-4)  Project Team Members
 Existing Customer Sales (4+)  On-Site Coordinators
On Site
 Truck Finders (6+)  Asset/Brokerage Coordination
 Accounting (2-4)  Agent Managers/Recruiters
 IT & HR Staff (1-2)  Specialists (e.g., Intermodal,
 Non-Employee Agents Ocean, LTL, OD/HH)
Typical  100% variable  Shifting from “how much can I afford  Salary bands and career paths
Incentive (using a draw) for to pay” to “how much do I need to within roles (CSR I, II, III)
Structure and all but accounting pay to get the right talent”  Performance mgmt systems
Challenges  Dealing with legacy problems from  Customized incentive plans by
OR Start-Up phase incentive plans role w/annual governance
(complacency, unfairness, lucrative  Goals/expectations set by role
 100% salary for
y annuities, can’t move accounts)
, )  Cost of comp managed from
p g
everyone with  Often struggling to get growth due the top (staffing needs to
small periodic to constricting use of team pools grow vs each person covering
profit sharing  Mgmt discretion/subjective judgment his/her own cost)
may lead to morale/legal issues
TH E CYG NAL G RO UP 7

8. Growing brokerages can find themselves
with many roles, organized many ways
SALES OPERATIONS AGENT
MANAGER MANAGER MANAGER
Small Big/Complex Project/Fixed
Accounts Accounts Rate Accounts
Incentive
Inside Sales Sales Rep Outside Sales design effort
New Customer New Customer New Long-term and dollars
New
Customers
Acquisition –
small, simple
Acquisition –
larger complex
Contract
Acquisition, FIND should be
focused on
targets targets (in/out) “Elephant”
Elephant
BRANCH these roles as
hunter
MANAGER they have the
Customer Account Project most:
Existing Service Rep Manager Manager
GROW
Grow existing Manage larger Manage several INFLUENCE on
Customers
small customers more complex contracted the company’s
existing
g accounts; focus
; bottom line
customers on customer sat. TEAM
LEADER
Truck Finder Dispatcher Project And
Find trucks, but Find trucks for Coordinators
Carriers may not know
from day to day
more routine
and predictable
Coordinate
deliveries, MAKE $ MEASURABLE
CONTROL over
what will be freight; regular provide reports the results
needed carriers to customers
“BROKER ”
Many organizations do not split these roles, opting to Credit & Accounts
combine into one person who “does both sides”. Collections Payable
“FREIGHT FINDER ”
Some organizations do not distinguish between new and Training &
Recruiting
existing customers. But remember, it is generally harder to call Development
brand new customers (cold call) than to call established ones.
TH E CYG NAL G RO UP 8

9. Establishing a compensation philosophy
can provide guard rails for future growth
How much do you want to pay relative to the market?
 How important is p y relative to benefits, work environment,
p pay , ,
work-life balance, career growth, entrepreneurial culture, etc.?
 What is the desired approach to the workforce? Long-term loyalty
or churn and burn?
How much team work should be included in the plan?
 Is the optimal culture for your organization one of competition or
one of cooperation?
 How much should individual performance influence pay?
 How much should top performers be rewarded?
 How much should under-performers be penalized?
Consider the competitive strengths of your company and
how they can be helped (or harmed) by different
compensation approaches.
TH E CYG NAL G RO UP 9

10. One of the first steps to making sense of this is to
develop a compensation structure for all your roles
 Target Total Compensation provides
a standard value for a job, allowing
Target Total Compensation (TTC) companies to benchmark their pay
levels against the market and
+ attract the right level of talent
 Pay Mix helps companies establish
Pay Mix consistent salary bands, which
allows for career progression within
+ a role as well as setting a TARGET
role,
INCENTIVE COMPENSATION
Leverage amount which defines what can be
earned at target performance
 Leverage determines the “upside”
amount a top performer can earn
(usually at the top 10th percentile)
Across  Combined, these numbers ensure
all Roles compensation and productivity are
managed as a cohesive system,
g y ,
rather than just by “winging it”
through negotiations with each
prospective new hire
 Budgeting for compensation costs,
Pay Structure staffing and productivity become
more disciplined and controlled
with this foundation in place
TH E CYG NAL G RO UP 10

11. Target Total Compensation (TTC)
includes all cash payments from all sources
$100,000
Annual
A l
$90,000
Incentive at
$80,000 Target
$30,000
$70,000
$60,000
$50,000 TTC = $100,000
Annual Base
$ ,
$40,000
Salary
$30,000 Midpoint
$70,000
$20,000
$10,000
$10 000
$0
Target Total Compensation includes base salary, commissions and
goal-based bonus payments. Payments for benefits and expenses
such as company automobiles are generally excluded.
TH E CYG NAL G RO UP 11

12. Target Total Compensation levels
are set for each role based on a number of factors
Consider each of these when setting TTC for a role
 Historical total compensation for those currently in the role
 Total compensation for comparable roles in the company
 Total compensation hierarchy for those above and below
 Market pay rates for comparable roles in your competitive
labor market
 Total compensation needed to attract new people into the
role based on recent hiring efforts (difficult or easy?)
 Any recent attrition of solid or top performers citing pay
 Geographic adjustment f t
G hi dj t t factors (rural vs city cost of living)
( l it t f li i )
Surveys such as the TIA Compensation Survey can
provide an additional objective, data point for setting
additional, objective
Target Total Compensation
TH E CYG NAL G RO UP 12

13. Pay Mix is the amount of pay in base salary vs
the incentive opportunity at target performance
$100,000
$90,000 Incentive
i
at Target Incentive = $30,000/$100,000
$80,000 $30,000 = 30%
$70,000
$60,000
$50,000
$40,000 Base
Midpoint Base = $70,000/$100,000
$30,000 $70,000 = 70%
$20,000
$10,000
$10 000
$0
With 70% of the TTC in the base salary and 30% in the Incentive,
we say that this plan has a 70/30 pay mix. The more pay
determined by incentive (“at risk”), the more “variable” the plan.
TH E CYG NAL G RO UP 13

14. Pay variability will be highest for those roles
dealing with small, transactional accounts
Small Big/Complex Project/Fixed Highly variable incentive plans are only
Accounts Accounts Rate Accounts
suited to roles:
 Having direct influence over
g
customers’ buying decisions
 Operating with limited team selling
or team work (more individually
based performance)
p )
 Where individual performance can
be tracked and measured reliably
 Required to deliver results so
important that incentives are paid
to those who produce, even in a
performance period in which the
company misses its goals
Pay variability (shown in red) decreases with
larger, more complex, and fixed rate
accounts.
 That have recruiting profiles . .
profiles.
 With a tolerance for personal risk
The less impact a single individual has on the
outcome, the more pay should come from  Willing to “bet on” their own ability
salary rather than incentive. to be productive
 Excited by the idea of handsome
Larger,
Larger more complex accounts are more
likely to be sold, grown, and managed by a
rewards for outstanding results
team rather than a single individual.
TH E CYG NAL G RO UP 14

15. The pay mix selection is also determined by the
desired culture and the available support resources
Pay Mix Operational Support
Base/ Motivational Impact Sales Perspective Management Perspective
Incentive
Requirements
0/100 Highly motivated to “I’m running my own “I want everyone to run Exceptionally strong
close deals and retain business inside this his/her own business and recruiting function and
business – also highly company. The sale is mine, make a ton of money, just as good depth in recruiting
independent the customer is mine. And if long as I get my % off the sources to handle high turn
I don’t make good money at top. I don’t want to have over. Good self-service
this, I have other to “manage” anybody.” reporting systems so staff
opportunities I can can monitor own progress.
pursue.” Quick & accurate payment
of incentives.
50/50 High motivation, with “The base is nice, but I can’t “I want a balance of Good training for new hires,
some willingness to live on it. And if I land the competitiveness and opportunity for career
accept direction and big deal, I’ll be all set for individual motivation with advancement, solid
be a team player within months. Don’t mess with team work. I want to pay operational systems with
the company my territory, my my top performers well, but limited “roadblocks”.
opportunities, or my sales they need to remember who Management’s job is to
goals – or I m out of
I’m they work for.”
for. enable high volume
here.” production and mitigate
paperwork/non-revenue
generating activities.
75/25 Motivated to sell, “Making my goal really “I want to build a strong Strong management
willing to try new matters to me, but if I fall a and loyal team who will teams and leadership, a
things if management little short I’ll be OK and be with me for years and consistent operational
asks them to
k h stick around – next year
k d who will provide solid and
h ill id lid d approach with d fi d roles
h h defined l
could be better.” consistent customer and career paths. Annual
service. Top performers performance reviews and
should get paid well in good merit increases necessary
years, if the company makes as base salary is stronger
money I want to share it.” lever.
100/0
/ Motivation and “It doesn’t matter what I do,
, “I’m tired of dealing with the
g Exceptionally strong
p y g
engagement depend I’ll make the same amount of negativity and wild swings of management, leadership,
entirely on money each year, so I just an incentive plan. I need to training, IT and HR systems.
management need to be sure I do know my fixed costs so I Frequent promotions, semi-
enough to keep my job.” can manage my staffing to annual reviews, lots of
my productivity levels.” recognition.
TH E CYG NAL G RO UP 15

16. Leverage refers to the amount of upside earned
by those who achieve excellence performance levels
$130,000
Additional
$120,000
Upside
p Leverage $60,000 paid at “excellence”
g
$110,000
$110 000 $30,000 $60,000/$30,000 = 2.0
$100,000
LEVERAGE FACTOR
$90,000 Incentive
at Target Incentive $30,000/$100,000 = 30%
$80,000 at Target
$30,000
$30 000
$70,000
$60,000
$50,000
$40,000
$40 000 Base
Midpoint, Base = $70,000/$100,000
$30,000
$70,000 = 70%
$20,000
$10,000
$0
 The full leverage amount is earned by those in the top 10% of performers
 The very top performers may earn more than the full leverage amount (if the
y pp y g (
plan is uncapped)
TH E CYG NAL G RO UP 16

17. Generally, the higher the percent
of pay “at risk,” the higher the leverage factor
180%
mpensation
160%
Additional Upside
100%
140%
rget Total Com
120% Additional Upside
Additional Upside, 7.5%
25%
100%
Incentive at Target, 15% Incentive at Target,
80% 25% Incentive at Target,
g
% of Tar
50%
60%
Base Midpoint
40% Base Midpoint
85%
75% Base Midpoint
20% 50%
0%
15% at risk 25% at risk 50% at risk
LF = 1.5 LF = 2.0 LF = 3.0
TH E CYG NAL G RO UP 17

18. Once each decision has been made
for each role, you have a pay structure
Target Excellence
%
% Min Mid Max Incentive Lever- Excellence Total Comp
Role TTC Incen-
Base Base Base Base Comp- age Incentive (using Mid
tive
ensation
i Base Salary)
B S l )
Outside
$100k 50% 50% $40k $50k $60k $50k 3.0 $150k $200k
Sales
CSR $60k 60% 40% $29k $36k $44k $24k 2.5 $60k $96k
Truck
$48k 75% 25% $29k $36k $44k $12k 2.0 $24k $60k
Finder
Project
Coord- $48k 90% 10% $34k $43k $52k $5k 1.5 $7.5k $50.5k
inator
i t
Salary Bands provide
Target Incentive Compensation (TIC) is the
opportunities for
amount earned at 100% of quota or the average
career growth and
or expected productivity level.
ensure consistent
hiring practices
It is NOT a maximum or a cap, but the amount
that should be earned by 50-60% of employees
in a role. 10% should hit excellence.
All figures are illustrative and do not represent
recommendations or guidance for any role or title which
may exist in your organization
TH E CYG NAL G RO UP 18

19. You will then look back to your roles to
determine measures and mechanics . . .
SALES OPERATIONS AGENT Less variable, likely to include company-wide measures
MANAGER MANAGER MANAGER for cross-team collaboration, avoid over-rides, consider
long-term mechanics to encourage retention & growth.
Small Big/Complex Project/Fixed
Accounts Accounts Rate Accounts BRANCH
MANAGER
Highly Highly Less Variable
Variable Variable High Salary
New
Customers Commission Commission Bounty and FIND TEAM
LEADER
Approach and Bounty Team Based
Team-Based
Likely Combination Bonus Likely
High to Moderately
Highly Moderate to Less Variable Variable
Existing Variable Less Variable
GROW Player/Coach duties
Strategic and
Customers
Commission, Goal-Based Customer will both be
Goal-Based or and Strategic
g Service represented in plan
Bounty Likely Measures Used Measures Used
Variability Moderate to Less Variable
Avoid commission
Depends on Less Variable over-rides on team
Truck
Finders
Company
Philosophy and Goal-based
Strategic and
Customer
Service
MAKE $ member results
Org Structure plan more Avoid generating
likely Measures
incentive “pools”
Least
“BROKER ”
Credit & Accounts Variable, tie
Highly variable if performance can be measured
Collections Payable to binary
individually, commission or goal-based possible
sta da ds
standards
and
“FREIGHT FINDER ” Training & company
Highly variable, use of goals may be needed to mitigate annuity Recruiting performance
Development
effect from existing customers, over-emphasize new customers
Use annual company-wide plan
TH E CYG NAL G RO UP 19

20. Introduction to The Cygnal Group
The Cygnal Group is a consulting firm offering expert
design assistance and high-value ongoing execution of
the sales planning process. Our consultants facilitate
design teams of leaders from Sales Finance HR and IT in
Sales, Finance,
designing variable compensation plans and target-setting
processes aligned with business imperatives. Our offering
includes ongoing services supporting clients’ sales
planning and sales compensation management processes
throughout the year, year after year.
Communication Expertise
We are specialists in delivering compensation as a management tool.
Our capabilities include developing communication strategies,
messages and content to ensure your compensation plans create
Incentive Design Technical Expertise motivation and excitement among your employees. In addition, we
The Cygnal Group has significant experience in incentive compensation frequently provide t i i
f tl id training t h l first-level managers make the
to help fi t l l k th
design for all types of sales organizations. The technical expertise extends most of the coachable moment when the new plans are first rolled
to ensuring a successful link between your overall business objectives, sales out.
and marketing strategy, and sound incentive design principles.
Robust & Flexible Incentive Design and Modeling Tools
Our consultants are recognized experts in incentive design, with recent Our proprietary Excel-based plan design and modeling tool enables
speaking engagements at The Transportation Intermediaries Association real-time design during Design Team meetings. The plan model
Conference, The Synygy Conference, authorship of articles in Workspan, enables the Design Team to keep an eye on the implications of the
and The Sales Compensation Quarterly, and a recently-published white design f both i di id l and th overall business results as key
d i for b th individuals d the ll b i lt k
paper on the challenges of administering incentives (“Drive Business parameters are set and changed and the plan is “tuned.”
Results Through Successful Incentive Administration,” PeopleSoft White
Paper Series). Incentive Administration Expertise
We frequently assist clients with a variety of tasks in this area, from
Goal Setting Expertise reengineering processes, developing specialized Excel tools, and
Most incentive plans in use today, and most of the ones we recommend, offering a full administration outsourcing solution to using our
depend on well-set goals to be effective. We understand goal setting, goal familiarity with your plans and the EIM market space to facilitate the
allocation, and the goal setting process, and offer services to i
ll i d h l i d ff i improve goall selection of h t d or i t ll d sales compensation administration
l ti f hosted installed l ti d i i t ti
quality ranging from best practices presentations to full goal setting process software. We can also assist with administration on various EIM
facilitation. platforms.
TH E CYG NAL G RO UP 20

21. We work with clients of all sizes, private and public,
across all industries, bringing solid domain expertise
to bear on your unique sales compensation issues
Some of the clients our consultants have served include:
 AMCOL  Integrity Logistics
 Ameri-Co Carriers & Logistics  Irving Oil
l
 Bank of America / MBNA  JH Rose
 Blakeman Transportation  Kalsec
 Bosch Automotive  Kohler
 Bosch Power Tools  Maritz
 Cardinal Health  Misys/Healthcare and Banking
 Choptank Transport  Morton Salt
 Comcast  Pitney-Bowes
Pitney Bowes
 CRST Logistics  Red Hat Software
 Dart Advantage Logistics  Reynolds & Reynolds / Automark
 Dealertrack  Roehl Transportation
 Express Scripts  Solae
 Fifth Third Bank  Stryker Navigation
 Flynn Transportation  Trustmark
 Herman Miller  US Bank
 Home Depot Supply
TH E CYG NAL G RO UP 21

22. While we answer some of your questions,
here is the email for the 20/20 offer
We will provide 20 minutes of free consulting to the
first
fi t 20 participants who email us at:
ti i t h il t
TL2020@cygnalgroup.com
Beth can be reached at:
beth.carroll@cygnalgroup.com
815-485-4711
Brenda can be reached at:
brenda.maldonado@cygnalgroup.com
847-562-2122
TH E CYG NAL G RO UP 22

23. End
T H E C Y G N A L G R O U P
Making your numbers . . . better.