In previous articles we looked at different organization structure such as Cradle to Grave or Split model organizations and I referenced the need to understand different compensation approaches when dealing with split roles so that you can do something OTHER than simply paying everyone a smaller and smaller percentage of the GM$. This article will be the first in a series that will go into detail on these different approaches and how you can learn to select the best one for your various roles.
The graphic will give you an idea of the range of options that exist. Commission approaches are shaded in green and goal-based approaches are shaded in blue, with decreasing emphasis shown with a lighter shade of color. The top of the V shows the most extreme versions of each option, while the bottom of the V shows options that are blends of the two approaches, with a “lean” toward the other side. For example, a progressive goal-based commission is still a commission, but it has a dash of “goal attainment” thrown in. And on the other side, a goal-based plan with a “drop-in” commission above a certain performance level is still fundamentally a goal-based plan, but it’s got a dash of commission.
Before getting into the details of the first set of options, you need to understand the difference between performance measurement on a transactional or aggregated basis. Transactional measurement means each thing you are counting stands by itself and is compensated accordingly. What comes before or after doesn’t matter and time-period is only relevant in terms of a “cut off” for counting what is paid on one paycheck vs another paycheck. Aggregation requires a performance measurement period such as a week, a month, a quarter or a year, and performance within this period affects the payout more than just summing up the total of unique items within the period. An example will help:
A transactional commission pays 5% of GM$ for every load. The total of all GM$ within a month x 5% determines the pay for that check but the ending of the month is just a cutoff date and changes nothing about the calculation other than the total.
An aggregated commission pays 5% commission on all GM$ if performance within the month is < $10k, but 7% on all GM$ if performance within the month is above $10k. Here, the month end date matters greatly as reaching a $10k aggregated goal before the month end closes increases pay more than just the value of one more load.
As I noted in the last article, a true commission (% of GM$) should only be used for the roles that have direct, individual, influence on the value the company receives from the negotiation with the customer or carrier. Goal-based options are appropriate for other types of roles, from executives to managers to track and trace. These roles may be highly influential in the success of a business, but it’s harder to objectively measure their performance.
The first level of options shown in the graphic (First Dollar Flat/Declining Commission & Binary Goal/MBO Plan) are both transactional calculation methods where each load or each event stands by itself and is not affected by performance before or after. These are also the most extreme versions of each type of approach.
First dollar flat commissions are very common in freight brokers and typically are used in conjunction with a salary and phrased something like: Salary + 5% commission on all GM$ [1]. Declining commissions are used when there is a desire to focus a sales rep’s attention on hunting for new accounts and are phrased as: new customers are paid 10% for the first 12 months, 5% for the next 12 months, and 2.5% thereafter. This tells the rep that new customers are worth more of their time and attention than existing customers. [2]
The Binary Goal Attainment/MBO Plan option should only be used for executives or managers who have very specific, long-term projects that are outside of their normal scope of duties. For example, your CTO (Chief Technology Officer) might be assigned the task of selecting and implementing a new TMS system and upon successfully completing this task, she would be eligible for a $20,000 bonus. You can see how this would be cumbersome to use for masses of employees, but for some roles it is just the right solution for providing extra incentive money for out of the norm assignments. If you are considering one of these plans, be sure the metrics follow the rules for SMART goals (Specific, Measurable, Achievable, Relevant and Time-Bound). You should also be clear about the definition of “successful completion” and the amount of money that will be earned.
Be sure to come back next month for a look at the Commission with a Draw or Seat Cost approach, which is very commonly used in freight brokers and can cause some unintended consequences. We will work our way through the rest of the options in the editions that follow.
[1] All rates are illustrative and not intended as recommendations for any role.
[2] You need to be sure this is TRUE before you leap on the declining commission train or you may find yourself wondering why your reps are ignoring penetration opportunities at your biggest accounts. Declining commissions are also administratively cumbersome as they require tracking the time that you’ve had an account and adding up different commission rates applied to different accounts within the same month.
Beth Carroll is the founding partner of Prosperio Group, a compensation development firm that helps transportation & logistics companies use compensation to drive profitable growth through enhanced employee motivation and rewards. Beth is based in Chicago, IL and has over 25 years’ experience developing incentive compensation plans for companies across the globe in a variety of industries. Beth and her team have designed plans for more than 500 Transportation & Logistics companies. Beth can be reached at 815-302-1030 or via email at beth.carroll@prosperiogroup.com.