I’ve been working with freight brokers for over 15 years now, helping them revise their organization structure and align their compensation plans to support the goals of their business. While the number of different possible organization structures is almost limitless, there are a handful of very common approaches. These can be seen as the “base template” if you will, and then variations and themes can be developed off of these templates. There are also particular compensation structures that seem to naturally go along with the different organization structures, with some approaches allowing much greater flexibility than others. As you start to consider different possible organization structures, note that your compensation plan and philosophy will affect your choices to an extent. There are really only two approaches, with some variations on each: Cradle to Grave and Split Structure. This article deals with the first; we will address the Split Structure in the next article.
In the Cradle to Grave structure, one person calls new shippers, manages the relationship with existing shippers, calls trucks to negotiate rates to move the freight, and probably also does their own track and trace. When a start-up brokerage is born this is what its founder or founders must do. Pay is also 100% dependent upon what is sold.
The natural evolutionary step is to add support resources. The broker working out of her bedroom does this when she hires her niece to manage the check calls. The broker working in his garage does this when his wife steps in and starts processing all the invoices. It becomes more efficient to delegate different roles and duties. One person cannot do everything. The first duties to get “handed off” are those that are specialized or clerical in nature. For the specialized roles, the owner will hire an accountant, someone with an IT background, a PEO for payroll, and a marketing firm to handle web design and SEO management. Clerical duties are easy to off load as the resources required are relatively inexpensive.
Within a growing brokerage made up of W2 Cradle to Grave brokers, these resources will be added in much the same way a real estate or insurance agent does, developing into “pods”. The resource has a seat cost associated with them, and that cost is “charged” to the broker through a reduction in the commission rate.
I’ve seen many brokerages adopt this model but use a bifurcated compensation philosophy. The broker is 100% commission, but all operational support resources are 100% salary (with a salary charge taken out of the broker commission). This encourages a divided structure within the organization and frequently breeds resentment and/or complacency. The broker may be making a TON of money, while others are making much lower fixed salaries. It’s not at all uncommon for me to hear complaints from the support staff about how they are the ones doing all the work while the broker gets all the glory (and pay). Management may also complain that the broker is complacent, not acquiring new customers, and not growing. I also know brokers in this plan that are working 80+ hours a week without vacation. In this case, owners often will express concern that they have become dependent on the machine-like work ethic of these brokers, but they know it can’t last. What happens when kids come along, the broker gets sick or is injured, or simply just doesn’t want to do it anymore? How much of your business is “at risk” when this broker has had enough?
For all of these reasons, I’m frequently approached by companies looking to move away from this type of structure. Bear in mind though there is nothing wrong with a pod structure, where there is a leader and a group of support resources. The REAL difference is in how they are paid and how they deal with work that is outside of their pod. Will they willingly share resources, or won’t they? In a more “corporate pod” model, the resources are more fungible and are shared or moved between pods based on business needs. Accounts may be moved from one pod to another to balance workload and ensure high levels of customer service. But, there is still a person or group of people who have the primary responsibility for ALL aspects of a customer’s business (cradle to grave). This works well for high-touch, high value freight that requires a lot of detailed knowledge and has high claim risk (TC, DOD, High Value/High Risk).
So, what is a better way to pay people in this type of model? I’m not wild about team commissions, but sometimes they are the best transitionary choice away from the “broker take all” approach. But even here, your compensation strategy can allow or hinder flexibility depending on how you set it up. Take a look at these two approaches:
Option 1: Defined Split %. Team pool = 10% of gross margin: 60% paid to Broker, 30% paid to Carrier Sales, 10% paid to Track and Trace.
Option 2: Defined Commission Rate. 6% of team gross margin paid to Broker, 3% paid to Carrier Sales, 1% paid to Track and Trace.
Mathematically they are identical and will pay the same amount both in aggregate and to each individual. But what about when you want to add a 2nd carrier sales resource? Under option 1 you are going to struggle with how to accommodate this change (each would have to get 15% and the share would keep reducing as you added more people). Whereas option 2 allows you to start to split up the workload w/out raising costs. Carrier Sales 1 gets 3% of all loads she moves, and Carrier Sales 2 gets 3% of all loads he moves. You may want both tied to achievement of a team goal for part of their plan (such as team load count) so they work together to ensure all freight is covered. The point is Option 1 leaves you very few alternatives other than just changing the percentage share of the pool. Option 2 gives you some flexibility to handle future changes. However, please note that Option 2 is defined by specific job title and NOT based on the duties a person takes on for a specific load. There are companies that would allow for 10% to be paid to a single individual if they did all of the functions. This defeats the purpose of role segmentation and explicitly discourages division of labor.
In either of the above situations, I would recommend having a tiered commission approach (below a level pays a lower rate, above a level pays a higher rate). Even if you only have ONE bar, you can now move the bar rather than changing the rate. The BEST way to do this calculation is to pay the higher rate only on the dollars above the bar (this is called a progressive commission plan).
In the next article, we will look at how companies use the Split Organization model and some different incentive approaches that can be used with it (the sky is now the limit in terms of incentive options!). When you can clearly define and differentiate your roles, your compensation plan can be directly tied to your specific objectives for each role. When you operate in a cradle to grave world, your commission plan needs to be very generic as it’s got to cover all bases in as simple a manner as possible.
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.