Sales compensation pitfalls common to the brokerage industry

1. Make your numbers… better.Motivate and reward your top sales people, dispatchers, and store managers…In good times AND in bad timesSeptember 17, 2009 The Cygnal Group has prepared this document for the benefit of attendees of the TIA Big Brokers Conference. This document is incomplete without the accompanying discussion and contains proprietary material. This document may not be reproduced, either in total or in part, circulated, or quoted from without the expressed written permission of our firm.

3. Coordinator/Dispatcher (called “reps” throughout for consistency)

4. Branch/Terminal/Company Store Manager

5. Branch/Terminal/Company Store Dispatchers/Coordinators

6. Outside Sales Rep (new business hunter – which can be small game or elephant)

7. Account Manager

8. Project Team Leaders and Members

9. Senior Leaders

10. We generally don’t get involved with agent incentive plans as market practices tend to dominate what you can and can’t do with their pay plans

11. We generally don’t develop incentive plans for administrative staff beyond a fairly standard annual bonus plan (and recommend that you don’t spend too much time or energy on these type of plans, either)

12. I estimate there are between 100 and 200 people worldwide who do what I do; some are with large firms (as I was) and others have gone the independent route (as I have)

13. As with any industry there are professional associations we belong to (SHRM, World at Work) and certifications we obtain such as CCP and GRP, both of which I have

14. And journals we write in (Workspan, Sales Compensation Quarterly), are quoted in (Synygy Newsletter) and conferences we present at (World at Work, Synygy)

15. The logistics and transportation industry in general is fairly new to using consultants for this kind of work, with CRST, Yellow and others as some notable exceptions2

17. Worked with Towers Perrin (one of the big dogs) as a Managing Consultant in Sales Force Rewards Practice for 10 years

18. Became a principal with The CygnalGroup in January 2008

19. Began working with CRSTL in the fall of 2007 and have continued to provide them with:

20. Design assistance for current and new roles (branch managers, branch coordinators, brokerage coordinators (carrier and customer, gov’t and commercial), brokerage team leaders, project managers and team members, senior leaders, new business developers, etc.

21. On-going plan administration and support for new plan development, transfers, new hires, etc.

22. Began working with JH Rose in April of 2009, helping them

23. Develop new compensation arrangements for their terminal managers and account managers

24. Began working with ATS/Allstates (small San Antonio broker/freight forwarder) in May of 2009, providing them:

25. Design assistance with new incentive plans for dispatchers and managers

26. On-going business management consulting and plan administration

27. Outside of this industry, I’ve personally designed and implemented incentive plans for more than 60 clients in a variety of industries, some of which are:

28. Business Service Providers: Comcast, GXS

29. Banking: Bank of America, US Bank, Fifth Third, Union Planters, Commerce Bancshares

30. Software/Hardware Sales: COTT Systems, DealerTrack, Reynolds & Reynolds

31. Insurance: Trustmark, Express Scripts, Capital Blue Cross

32. Consumer Products: Bosch Automotive, Bosch Power Tools, Kohler

33. Food Manufacturing: Solae, KALSEC

34. Other: Irving Oil (B2B Oil sales), Herman Miller (Office Furniture), Stryker (Medical Equipment)3

35. It’s obvious that good sales compensation plans can improve business results – but there’s more work getting there than you might think 4 To get this… You need these...

37. Fixed pay (salary) = regular compensation paid regardless of performance, typically set for a year

38. Commission = a form of incentive pay that uses a calculation formula based on paying a % of revenue, margin or profit. The primary reward is for VOLUME – those who sell more make more. Pay can be linear or non-linear in relation to performance; it is common in brokerage plans to find a “straight commission” plan (i.e., 10% of margin).

39. Goal-Based Incentive= a form of incentive pay that is tied to the attainment of a specific goal and delivers a set amount of pay in relation to that goal. The pay could be a fixed dollar amount or a % of salary. The primary reward is for goal-attainment or growth. Pay in relation to performance is rarely linear, and will escalate to drive business results.

40. Pay Mix = the amount of fixed and variable pay as a % of 100%. For example, an 80/20 pay mix means the salary delivers 80% of the total pay and the incentive (at target performance) delivers 20% of the total pay. Many broker roles are 0/100 (if they have no salary or use a draw) or 50/50 if their salary is the same as their target incentive opportunity.5

42. Wrong Measures

43. Too Many Measures

44. Sales Credit Wars

45. The World is Full of Haves and Have Nots

46. Distracting Contests and Spiffs

47. Bad Sales Reporting and Crediting6

48. 7 Pitfall: Lack of Growth Symptom: Sales to new customers have stagnated, volume is coming from the same customers but seems to be random (sometimes it’s good, sometimes not), reps seem more reactive than proactive Cause: Compensation plans are based on a flat commission rate (e.g., 10% of margin) with no goal or escalation to drive increased volume above a desired level Cost: No new customers Competitors may be nipping away at your share without your realizing it Reps may be complacent with level of earnings attained and believe they can’t do any more Solution: Incorporate a goal into the plan where pay levels change. There are MANY different ways to go about this, depending on the desired outcome, business economics, and current pay structure.

49. 8 Pitfall: Wrong measures Symptom: Sales results are strong (as measured), sales comp costs are high, but company profits are down Cause: Sales people are measured on revenue or unit volume with not enough emphasis on margin so they are giving it away, OR sales reps (and management?) are too heavily focused on margin percentage without regard to need for volume and are walking away from sales to preserve an antiquated margin % goal Cost: The wrong customers and carriers are being added to your portfolio, destroying your reputation for customer service Good deals are being turned down, eroding your market share Sales comp costs are rising and profitability is slipping Solution: Measure and reward sales people for bringing in “the right revenue” (more aggressive pricing, balanced emphasis on volume and margin %) – majority of emphasis in plan should be on gross margin dollars

50. 9 Pitfall: Too many measures Symptom: Sales people ignore some of the important results you need, focus where they can make the most money, and come out just fine Cause: Sales people are measured on too many different things, giving them the ability to “cherry pick” the plan and win however they choose to win Cost: The company may have lost the ability to focus and direct sales effort, offering more of a “menu” of options to the sales people Sales compensation costs may be hard to model as a function of business results Solution: Pick a few important measures, and put enough opportunity on each that no one can ignore any of them and remain whole; consider linking measures

51. 10 Pitfall: Sales Credit Wars Symptom: Sales people and sales managers spend WAY too much time arguing over who gets credit and you find yourself splitting credit on an $10 load because one dispatcher answered a phone call about a load in transit while the originating dispatcher was on lunch break Possible Causes: Incentive plan does not have any component that is team based, the plan is 100% variable (no base salary), the commission rates are set based on productivity expectations from 2007 without a rebalancing of staff for lower volume levels, and/or credit sharing rules are not well documented, subjectively applied, and invite appeal and debate Cost: Lost sales capacity and management distraction Resentment and morale deterioration due to sales people questioning fairness Lost margin if the company “defaults” to double crediting (unlikely in this industry!) Solutions: Incorporate a team-based component in the plan so everyone can share in a little bit of all that is produced; consider the message being sent by a 100% variable plan and if your draw is really a phantom-base; adjust your commission rates to reflect current volume and/or lay-off staff, document appropriate credit sharing circumstances

52. 11 Pitfall: The world is full of haves and have nots Symptom: Your top earners are not necessarily your best reps, or the gap between winners and the losers is too big Cause: Good accounts may have been “given” to a particular rep for reasons other than good performance, and your accounts have not been rebalanced to reflect changes in your customer base Cost: High turnover among new hires as they struggle to “catch up” A false sense of “success” for the top performers that may leave them floundering if a big account leaves – they need selling skills as well as maintenance skills Resentment among the sales force that some people are making more money just because they were “given” the plum customers Solution: Rebalance accounts frequently to gauge consistent top earners over time, this also helps create a tie between your company and your customer rather than between your customer and your rep and helps create an environment whereby reps can cover for one another; ensure reps are required to grow and develop new business

53. 12 Pitfall: Distracting contests & SPIFFS Symptom: Sales people are excited, motivated, and making money on the contests – but overall results are sub-par Cause: Contests may have been added mid-year to make up for overly aggressive goals or marketplace disappointments Cost: The sales people don’t believe you “mean it” any more when you publish a comp plan – if their results aren’t earning them enough, you’ll find a way to make it up for them Your cost of comp becomes hard to predict, and is no longer a direct function of business results Solution: Consider adjusting the goals or the comp plan rather than layering contests and SPIFFs over it There is a place for contests and SPIFFs – to direct effort towards important but temporary initiatives

54. 13 Pitfall: Bad sales reporting & crediting Symptom: Sales people maintaining a shadow accounting system to track and report their own results Cause: Inaccurate crediting of sales to individuals, late billing, systems breakdowns, manual systems, lack of reports provided by management to reps on current progress Cost: Lost sales capacity (they should be on the phone, not documenting each load in their own Excel file) Management distraction (reconciling the reps Excel file with the pay statement can be a nightmare, especially with all the adjustments that can happen after shipment!) Elevated cost of comp - errors resulting in under-payment are the ones caught and reported Solution: Simplify plans, develop reports to tell the reps how they are doing on a daily basis, invest in systems solutions, make accurate crediting and timely reporting a priority

55. 8 guidelines for managing incentives in challenging economic times Keep plan designs simple and straightforward No complicated math; follow the napkin rule! Limit the number of measures to three (human beings cannot do more than 3 things at 1 time) Avoid linkages and hurdles that limit or take pay away unless absolutely critical to the business You have more important things to focus on than explaining your incentive plan over and over again! Ensure performance measures are relevant and controllable by the individual while still selecting measures critical to business success Find the balance between using important measures and using relevant and controllable measures, for example: margin is king in your world, but new business hunters rarely have control over the margin on any given load, so it may be better to reward them for revenue The philosophy to pay employees for loads only when they are paid is a carry over from the agency model, and may not be necessary in a large organization with a fully staffed credit and collections department Do not pay for activities – only results! Use relative growth goals to avoid the feast or famine which comes with volatile economic conditions Use an escalating commission rate when a new sales person exceeds his/her prior period rolling average performance, but don’t get “wild and crazy” with the steepness of this step! Use a shorter performance period than you would in a stable economy 14

56. 8 guidelines for managing incentives in challenging economic times - continued Use team based performance metrics to support the desired culture (some firms want full cooperation, others want more competition but need a bit of cooperation at times, others have become so cut-throat that incorporating a team measure is required to stop the blood-shed!) If your team is larger than 2 people you need to include an individual modifier to ensure you are not over-rewarding a weak player or under-rewarding your superstar Avoid plan proliferation For each incentive plan you are considering, be sure the value the incentives will create is worth the additional time and expense you will be investing Be consistent as much as possible, without defaulting to “peanut buttering” your system (big deal hunters should not have the same comp plan as reps who should not have the same comp plan as team leaders or managers, but one terminal/branch manager’s plan should be the same as another's’) Ensure performance results can tracked accurately Employees need to know that their pay is not based on faulty or inaccurate data, especially when their incentive checks are shrinking Model your plan designs under a variety of potential outcomes The possibility of wide swings in results is greater than ever, so be sure you consider what you may currently think is impossible when you model payouts and build a re-usable, easily updatable model Do not rely solely on incentive plans to manage your staff 15

58. Is our compensation cost as a percent of MARGIN improving? (Revenue is too volatile in your industry to use as a consistent standard)

62. End