21 May Driver Pay – an Intro for Brokers
“The aim of marketing is to know and understand the customer so well the product or service fits him and sells itself.” — Peter Drucker
At the recent TIA conference, I was asked many times how my business is going. Many of you have known me from nearly the start and I’m always touched by the genuine interest and support so many of you give. I explained to some of you that I’ve been doing more work with driver pay, and more than once I was met with a bit of a puzzled look and the question…”aren’t they just paid by the mile? How hard could it be to raise that a penny (or five)?” and so it occurred to me that my knowledge and exposure to a slice of this industry that most brokerage aren’t exposed to, could be valuable knowledge to help you all understand YOUR customers on the carrier side of things. I won’t go into exhaustive details as this is quite literally going to be the topic of my next book, but instead I thought I’d do a short primer so you have some facts and figures in your hip pocket if you ever need them.
Types of drivers: Drivers can be divided into company type (For-Hire and Private Fleet) as well as by employment type (W2 or Owner Operator/1099), by equipment knowledge and type (Flat, Tanker, Van, PUP), and certifications (HazMat, cross-border). There are different route types: long-haul, team, dedicated, regional, expedited, local PU and Delivery, line-haul, yard, shuttle, etc. There are different delivery types: drop & hook, dock, lift gate, ramp. Also, each of these things may be called by a different name and be the SAME thing, or be called by the SAME name and be a different thing, depending on the company you are talking to (just consider how many different terms exist within brokerage for the thing that is Revenue minus Purchased Transportation: Gross Margin, Gross Profit, Net Revenue, Net Margin, Gross Revenue (yes, I had to confirm this is what they meant), Brokerage, Spread, Revenue, Gain Share, and on and on and on.)
Generally speaking, most brokers deal with For-Hire carriers, whose drivers have a CDLA license and who are operating in a long-haul or regional market. They are likely not dedicated carriers or private fleets, unless they are looking for backhaul loads. With this broad generalization, however I guarantee any of you knows more about the various driver and truck types than I do, but you may not know how vastly different the pay arrangements are among these groups. Let me caveat what follows with I have only begun to scratch the surface on this world…and the variations and nuances that I’ve yet to discover are HUGE. I absolutely will miss some critical segment, or mistakenly assume that the rest of the flat bed carriers pay drivers the way the two I’ve worked with do, etc. But…this is what I know…so far.
Private Fleet is the place to be for pay. ATA just released it’s 2017 compensation survey data as cited in the April 23 edition of Transport Topics. Median pay for For-Hire carriers was $53,000 and median pay for Private Fleet carriers was $86,000. I would need to dig into the numbers a little bit, but the last round of data I had been using was $55k for For-Hire and $77k for Private Fleet. I suspect an error in either the data or the reporting on the data, as my experience would peg median For-Hire carrier pay at now closer to $60k. The increase in Private Fleet does not surprise me at all as in the last three years I’ve worked with several big private carriers on their driver pay and I’ve regularly seen annual W2 earnings in the six figures for more than 25% of the drivers, with some as high as $125k or $150k.
This begs a question, doesn’t it? Why do private fleets pay so much more? Short answer…they can. Private fleets make profit off the product being delivered not the delivery of a product, and the driver is a customer service extension and, in some cases, even a sales person (think convenience store beverage distribution). The margins here are often far greater than the 5% – 15% net income numbers hoped for by most For-Hire Carriers and so they can afford to (and want to) hire the very best. I’ve interviewed both types of drivers and among private fleet drivers it’s not uncommon to find retired college professors or other ex-white-collar professionals who are attracted to the lifestyle that private fleets offer. (Oh yes – I just said that. In addition to paying $20k to $30k more a year, most private fleets have better home time and better benefits than For-Hire carriers). They also have single digit turnover.
Quick lesson on For-Hire Trucking Accounting: they often use a number called OR (said O – R) for talking about their profit ratio. The number will be 95, or 90, or 80 or 102. This is simply the inverse of the EBITDA number with some ins/outs that have to do with how truck leases are accounted for (beyond my expertise). But essentially a 95 OR means they have Net Income that is 5% of Revenue. 80 OR would be 20% Net Income (nirvana) and 102 OR means they are upside down and spending more than they are making. Any given terminal/distribution center/service center could be operating at > 100 OR but they provide freight for non-profitable backhauls which contributes to an overall network profitability (now think about how you would do an incentive plan for the branch managers when the best one of them can do is lose LESS money!). But this is why brokers are so important to the efficiency of the system…brokers can help boost those unprofitable lanes by finding freight that keeps those trucks from moving empty.
Which gets me to my first “I bet you didn’t know” on driver pay. I bet you didn’t know that while most For-Hire carriers pay by the mile, some pay a different rate for loaded vs unloaded miles. A driver may make less for running unloaded miles, which makes perfect economic sense given the company isn’t making anything on those miles, but is it really the drivers fault they are unloaded? Sometimes, maybe, but certainly not every time. Hmmm. It certainly would motivate a driver (to the extent they can) to reach out to a broker to get a load (any load) into that truck!
Second “I bet you didn’t know” – yes, mileage pay makes up the bulk of most For-Hire carrier pay plans (75% – 85%), but drivers are also paid for a laundry list of 25 to 100 different items. These are called anything from “add-pay” to “non-core pay” to any variety of other terms and cover things like: backhaul, detention, cross-border pay, tarping, NYC Borough pay, toll pay, wait time, meetings, drug testing, DOT inspections, layovers, per diem, stops, drop and hook, slip seat pay, trainer pay, etc. One day I will compile a list. It will be very long.
Some drivers are allowed to have pets. Some are not. Some are allowed to have a companion in the cab. Some are not. Some are paid for holidays (usually it’s a flat amount like $100). Some are not. Some are given vacation pay (and there are lots of different ways to calculate the PTO rate). Some are not. Some are charged different (higher) benefit rates than the rest of the employees in the company (presumably because of higher health risks). The variations of options are endless. So it always surprises me that drivers (and companies) spend so much time talking about the rate per mile. EVEN IF that were the most important question (it isn’t) a high per mile rate means nothing if the company can’t provide enough miles. A better discussion point would be the median W2 pay for a driver and the value of the various benefits. But I guess mileage rate is simple and $0.55 sounds so much better than $0.50. But if you get 10% less miles, you are no better off. (Fun fact: at 65 miles per hour (governing limit) and 70 hours per week (legal limit) the most miles any driver should legally get is 4,550. Most dry van OTR trucking companies are profitable around 2,000 miles per week (probably a little more). 2,000 x 52 x $0.55 (Mavericks new rate per Transport Topics) = $57,200. If the driver can get 3,000 a week they can make $85,800 a year. This is 152k miles a year and about the top that I usually see for single drivers. Based on my best guess at what % of total pay is made up by mileage pay (~85%), I would guess drivers at $0.55 per mile are bringing home between $65k and $70k a year, which is why I think the reported $53k median pay is too low).
Even if we just look at the For-Hire world, mileage pay is not the dominant factor you may think it is. Most local pickup and delivery drivers (think LTL carriers) are paid by the hour using a very industrial (union) “step rate” system that is based on tenure in position. LTL Line Haul drivers (between terminals), however, may be paid on mileage only or a combination of hours and miles. Some flatbed carriers pay a % of the revenue on the load. I’ve seen this for W2 as well as Owner Operator drivers. Tanker drivers may be paid by the hour or a combination of hour, stop, and revenue. For some reason, expedited carriers favor the owner operator model vs the W2 employee model. Too much irregularity in freight, maybe?
In the private fleet world, it’s even MORE of a mess, with primary pay being calculated on things like: mileage, cases delivered (a # count – and the rate is usually pennies per case), stops, weight, cube, hours, piece rate on returns or salvage (if the driver can bring back empty containers or used products), and again there is the laundry list of additional items that are paid for in addition to the core pay. Some companies are working to consolidate these items down, and using an hourly component helps cover many of them in one bucket (delay, wait, meetings, etc.). If ALL hours are paid for, then you don’t need to segregate out the separate items being measured. BUT…it does raise another problem. Which hours are paid for? I spent 45 minutes at one meeting talking about sleeper berth hours and how they would be counted in the system. It’s not as straight forward as you might think, especially when you are dealing with team drivers.
There are a variety of laws in effect or coming into effect that will impact how drivers are paid. There are mandatory meal and rest break pay laws in CA that affect carriers who have drivers domiciled in CA. There are overtime regulations that are challenging the traditional motor carrier act exemption. These things are pushing more carriers to think about using an hourly component for at least a part of their plan (many do already for wait time, detention, and meetings).
I will share more as I learn more, as I do think it’s helpful for anyone in this industry to get a view into the incredibly complex world of driver pay. A For-Hire carrier may think “everyone else does it the way I do” – and they would be wrong. Just as a broker who thinks “everyone else pays a 30% commission” is also wrong. Gaining understanding gives options and can help anyone servicing this industry be more sympathetic to the immense complexities that pervade literally every corner of the US supply chain world.