Managing Compensation Plans Through Extreme Market Volatility
I’ve been a sales compensation consultant for 22 years. During that time, I have experienced the dot.com boom and subsequent quick bust, September 11, the worst economic recession in a generation, and all manner of natural disasters that have impacted earnings under incentive compensation plans. There has been nothing like COVID-19 however, and many of the rules that we have all learned to play by simply will not work for this situation. We need to think about the psychology of pay first, but also consider the math, and for the first time in my history – we really also need to think about the broader societal and social implications of how we manage employee plans for the next 30, 60 or maybe even 90 days (I truly pray it is not longer than that).
Many in transportation know that 2018 was a record- breaking year. They know that freight rates went through the roof and so did employee pay when those employees were tied to commission based performance metrics.[1] Many people made a lot of money in 2018, and not all of it was justified or deserved as a direct result of superior selling skills or hard work. I worked with many companies during this time to reduce plan variability by introducing or increasing base salaries and tying commission escalators to production tiers or introducing the concept of relative goals. Those that made these changes in 2018, or who already had these kinds of plans, should experience less whipsawing now that we are headed in what is certainly the direction of a (hopefully) short-term, but incredibly steep economic downturn. However, if you did not make these changes then there are some things you should do NOW…TODAY…to help ensure your workforce and your company come through this experience financially and psychologically intact.
First, decrease the volatility and uncertainty in your plan. If you are using a recoverable draw, make it non-recoverable…so that employees do not feel they will be digging themselves into an interminable pit of debt (believe me, that’s happening OUTSIDE of the office already. They don’t need to add the pressure of owing their employer to what may already be going on with their credit cards and car payments). If you have a very low base salary, and your plan, as designed, is less than a 50/50 pay mix, now would be a good time to raise the salaries and lower the incentives. You are reducing risk (real or perceived) for your employees which will help them think calmly and do their job well during times of incredible personal stress and fear. You also need to consider that there may be pockets of your employees who are going to benefit tremendously, at least in the short term, from COVID-19. Currently those would be people who are dealing with customers who are replenishing store shelves, but tomorrow it could be a different group. At the same time, in the same organization, there may be groups who are seeing their sales sources dry up completely. Just consider food distribution, if your sales force is split between restaurants and grocery stores, as many are, you will quickly see a disparity in performance that has NOTHING to do with how good or bad a job any of them are doing.
To balance this out, you need to consider shifting a portion of the variable compensation to be team driven, so that the high performing areas and low performance areas have a chance to offset each other. This also will make it easier for you to rebalance your workforce to go where the work is needed when it is needed, which could change very rapidly. You will need maximum flexibility on workforce planning in the next 4 to 12 weeks and the last thing you need is your incentive compensation plan hindering who can work where or when because of territory protection. Just as doctors in Italy have given up their specialized practices and are now all infectious disease practitioners, our work force will be asked to learn new things very quickly and to stretch into areas they do not normally work. You need to be sure the rewards will be fairly aligned with these new efforts.
Many of you will also be setting up work from home arrangements which will no doubt raise concerns that some significant portion of your staff will take the opportunity to goof off rather than be serious about work. Some will, yes. Not everyone has matured enough to be able to handle themselves well in times of crises (see videos of parties and vandalism emerging from college dorms at campuses that are shutting down), but many will rise to the occasion if given a chance. First, make it clear that employees who are not taking their duties just as seriously as when they are in the office will be given one warning, and one warning only, and then terminated. If some of your employees self-select out of your organization because they lack maturity and focus, then that means there will be fewer layoffs you need to do later and more compensation dollars you have to take care of the rest of the team. For those that can make the transition, look for additional ways that you can motivate them for working well in new circumstances. Even if business volumes were not drastically impacted by the virus, just shifting to a WFH setting would cause a dip in any employee’s productivity while they figure out new technology, family routines, and business processes. You need to make some (modest) adjustments to quotas and performance expectations to account for this disruption and still let them know they are doing a good job. Remember your compensation plan does more than just simply provide income to your staff – it communicates to them what “good” looks like, and there will be a very different definition of “good” over the next few weeks. You need to be willing to adjust your performance tiers, quotas, and other expectations. This could mean lowering the actual goal itself or lowering the threshold level of performance required to start to get incentive pay. I prefer the latter.
If you do decide to lower the goal or quota, then you should also reduce the target incentive amount by some amount to ensure your business economics remain functionally healthy (we are not going for robust here, we are shooting for “live to see another day” level of profitability). Everyone will need to adjust make this happen and one of the ways you do this is by making goals more realistic. Another is by keeping payouts within reasonable bounds given current economic circumstances. Certainly, if you have also added or increased salaries, you should also reduce the amount that is in the incentive plan.
Not all of these changes will be received enthusiastically by your staff (though those that decrease volatility certainly should) and we do not have the luxury that we usually have for doing extensive modeling and planning for thoughtful communications. However, these changes need to be made immediately. As a leader in the organization, consider that many of your employees are flat out scared. This will manifest itself in many ways, many of them unpleasant. Your job is to lead them calmly through this time (regardless of your personal tumult) and ensure that your business is healthy on the other side of it. Please also consider the message your personal actions are sending if you are asking your employees to make sacrifices in their compensation. This is not the time for you to buy a new expensive automobile, remodel your house and have a party for your staff (for a variety of reasons this is not a good idea right now!), or do anything else that indicates that you are not just as willing to make the same level of sacrifice that you are asking of them.
We can get through this, as individual businesses, the country and indeed, the world, grapple with an unprecedented event in modern times. But waiting to address your current, highly volatile compensation plans until better times, is no longer an option. If you would like to talk through some approaches for your particular circumstances, please email me at beth.carroll@prosperiogroup.com.
[1] While I will use transportation as my point of reference in this article, all of these concepts could apply to any other industry that experiences strong impacts from external forces that go far beyond employee control.