Incentive Comp For The T&L Industry Part 1

TIA & The Cygnal Group Present

Incentive Compensation for the Transportation & pLogistics IndustryPart 1 –

Role Clarification, Pay Levels and Pay Mix

September 8, 2010

The Cygnal Group has prepared this document for the benefit of the Webinar Participants. This document is incomplete without the accompanying discussion and contains proprietary material. This document should not be reproduced, either in total or in part, circulated, or quoted from without the expressed written permission of our firm.

T H E C Y G N A L G R O U PMaking your numbers . . . better.

Incentive Compensation for the Transportation & Logistics Industry

Part I (today) Why use an incentive compensation plan? How can we ensure its success?

Why do incentive plans become more challenging as companies grow?

How are companies organizing themselves? Why does role clarity matter?

Why is it important to set target total compensation and pay mix by role? Why is it important to set target total compensation and pay mix by role?

Part II (date will be set shortly – watch your emails) How does a company decide what to measure and reward for in their incentive plan?

Wh t th diff t tt ib t f h f ? What are the different attributes for each performance measure?

What math formula (mechanics) should be used to deliver the pay?

When and how should qualifiers or modifiers be used?

P III (f ll i II)Part III (following part II) What is the best way to test an incentive plan before rolling it out?

How does a company ensure its employees understand and are motivated by the incentive plans?

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incentive plans?

What are some common mistakes in this industry and what are the solutions?

2

Incentive compensation serves several worthy purposes

Purposes of Incentive CompensationPurposes of Incentive CompensationCommunicate Company ExpectationsCommunicate Company Expectations Clarify key accountabilities for each role (megaphone effect)

Assign specific productivity targets for each person or role (define expectations)

Create and reinforce the desired company culture

Support ChangeSupport Change Move the company to develop a new strength (e.g., new customers, new freight)

Move away from a negative culture (e.g., complacency, aggression, independence)y g ( g p y gg p )

Manage TalentManage Talent Attract top performers in each role

Appropriately reward top performers to ensure retention Appropriately reward top performers to ensure retention

Ensure the cost of compensation is appropriate for the amount of profit, and is decreasing over time

Manage and Share RiskManage and Share Risk

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gg Provide additional upside when an individual has a very good year

Reduce the cost of compensation in years when results are disappointing

However, companies can destroy the value of their incentive dollars in many ways

Abdicating management duties to the incentive plan Using incentive compensation to “starve out” non-performers

Not providing feedback to employees; they don’t know how to make more

Not planning for exceptions in advance (new hires, terminations, etc)

Not coordinating company strategy with the incentive plan Sending mixed messages (paying for one thing, but expecting another)

Linking incentives to subjective evaluation, activities rather than results, and/or uncontrollable outcomes

Not being thoughtful and careful about plan design Changing the incentive plan too frequently and without adequate explanation or

notice 1x a year is typical, more than that should be done only in emergenciesy yp , y g

Not modeling incentive payouts under different scenarios to ensure economic soundness This results in too much or too little pay being delivered

U i hi hl l ti dd SPIFF f d l i t t b h i


Using highly lucrative add-on or SPIFFs for secondary, less important, behaviors, or to correct a mistake or problem in the core incentive plan

Before starting an incentive design process, leadership needs to answer these questions

Why are we doing this?

What business problem are we trying to solve? What is broken that must be fixed? What is broken that must be fixed?

Does everyone in the organization agree on “the” problem or are there multiple problems? How will we come to agreement about the prioritization of the problems? g p p

Are all the problems compensation related? If not, which of these must be resolved BEFORE changing compensation?

How will we know if we made things better or worse?g

A year from now, we expect something to have improved, something measurable – what is it, and what is the target? Common answers are: Revenue or margin growth

A i i i f Acquisition of new customers Better penetration of existing customers Improved margin % Improved coordination across teams Decreased complacency


Decreased complacency Reduced turnover and/or better ability to hire top talent

Remember that much of the work you will be doing is actually change management

Whose buy-in will be needed to change the incentive plans? Often this goes beyond the President or CEO to include leaders in:

Sales HR Sales Operations Finance

Be sure you know what each stakeholder expects, and what their “ d k ” f h l k l b d ff

HR IT

“yardsticks” for success are as they are likely to be different.

What will it take to ensure the buy-in of employees? Start this work at the beginning of the design process:

Announce the design project to all affected employees Manage expectations about project timing – tell them what will happen when Gather suggestions from the staff through interviews with a third-party Consider a challenge team meeting with your team leaders Consider a challenge team meeting with your team leaders

Remember that incentive compensation is about a lot of things, but motivation is central – and these


g ,are the people you are trying to motivate

As Transportation Brokers grow, their incentive compensation needs change

Characteristic Start-up ($0 -$10m)

OrganizationStructure

Flat Everyone does

A Growth ($10m - $100m)

More role differentiation Geographic team structure OR

A

B

C

Market Leader(>$100m)

Increased complexity Highly specialized roles Structure Everyone does

everything Geographic team structure OR Account-based team structure Beginnings of freight specialization

may be found (e.g., LTL division)

Highly specialized roles, including use of highly paid specialists

Account AND Geography may both be used, as well as Freight Type

Typical Roles Found

President (sells) Right Hand: Sales

Rep or Ops Mgr Truck Finder (1-3) Accountant (PT)

President Sales Manager (0-1) Operations Manager (1) New Customer Sales (In/Out) (1-2) Team/Branch Mgrs (3-4) Existing Customer Sales (4+)

All roles found in Growth Phase (with more headcount) PLUS Big Gun Sales (Contracts) Project Managers Project Team Members On-Site Coordinators

Typical 100% variable

Existing Customer Sales (4+) Truck Finders (6+) Accounting (2-4) IT & HR Staff (1-2) Non-Employee Agents

Shifting from “how much can I afford

On Site Coordinators Asset/Brokerage Coordination Agent Managers/Recruiters Specialists (e.g., Intermodal,

Ocean, LTL, OD/HH)

Salary bands and career paths Incentive Structure and Challenges

(using a draw) forall but accounting

OR

100% salary for

to pay” to “how much do I need to pay to get the right talent”

Dealing with legacy problems from Start-Up phase incentive plans (complacency, unfairness, lucrative annuities, can’t move accounts)

within roles (CSR I, II, III) Performance mgmt systems Customized incentive plans by

role w/annual governance Goals/expectations set by role Cost of comp managed from


yeveryone with small periodic profit sharing

, ) Often struggling to get growth due

to constricting use of team pools Mgmt discretion/subjective judgment

may lead to morale/legal issues

p gthe top (staffing needs to grow vs each person covering his/her own cost)

Growing brokerages can find themselves with many roles, organized many ways

Small Big/Complex Project/Fixed

SALES MANAGER

OPERATIONS MANAGER

AGENT MANAGER

Inside Sales New Customer Acquisition –small, simple targets

Sales RepNew Customer Acquisition –larger complex targets (in/out)

New Customers

Small Accounts

Big/Complex Accounts

Outside Sales New Long-term Contract Acquisition, “Elephant”

Project/Fixed Rate Accounts

FINDBRANCH

Incentive design effortand dollars should be focused on targets targets (in/out)

Customer Service RepGrow existing small customers

Account ManagerManage larger more complex existing

ExistingCustomers

Elephant hunter

Project ManagerManage several contracted accounts; focus

GROW

BRANCH MANAGER

these roles as they have the most:

INFLUENCE on the company’s bottom lineg

customers

Carriers

Truck FinderFind trucks, but may not know from day to day what will be

DispatcherFind trucks for more routine and predictable freight; regular

;on customer sat.

Project CoordinatorsCoordinate deliveries, provide reports

MAKE $

TEAM LEADER

bottom line

And

MEASURABLE CONTROL over the results

needed carriers to customers

“BROKER ” Many organizations do not split these roles, opting to combine into one person who “does both sides”.

Credit & Collections

Accounts Payable


“FREIGHT FINDER ” Some organizations do not distinguish between new and existing customers. But remember, it is generally harder to call brand new customers (cold call) than to call established ones.

Recruiting Training & Development

Establishing a compensation philosophycan provide guard rails for future growth

How much do you want to pay relative to the market?

How important is pay relative to benefits, work environment, p p y , ,work-life balance, career growth, entrepreneurial culture, etc.?

What is the desired approach to the workforce? Long-term loyalty or churn and burn?

How much team work should be included in the plan?

Is the optimal culture for your organization one of competition or one of cooperation?one of cooperation?

How much should individual performance influence pay?

How much should top performers be rewarded?

How much should under-performers be penalized?

Consider the competitive strengths of your company and


Consider the competitive strengths of your company and how they can be helped (or harmed) by different

compensation approaches.

One of the first steps to making sense of this is to develop a compensation structure for all your roles

Target Total Compensation (TTC) Target Total Compensation provides

a standard value for a job, allowing companies to benchmark their pay levels against the market and

Pay Mix

levels against the market and attract the right level of talent+

+

Pay Mix helps companies establish consistent salary bands, which allows for career progression within a role as well as setting a TARGET

Leverage+ a role, as well as setting a TARGET

INCENTIVE COMPENSATION amount which defines what can be earned at target performance

Leverage determines the “upside”

AcrossAcrossall Rolesall Roles

amount a top performer can earn (usually at the top 10th percentile)

Combined, these numbers ensure compensation and productivity are managed as a cohesive system,

Pay Pay StructureStructure

g y ,rather than just by “winging it” through negotiations with each prospective new hire

Budgeting for compensation costs, staffing and productivity become


Pay Pay StructureStructure staffing and productivity become more disciplined and controlled with this foundation in place

Target Total Compensation (TTC) includes all cash payments from all sources

A l $100,000

Annual Incentive at

Target$30,000

$70,000

$80,000

$90,000

Annual Base Salary $40,000

$50,000

$60,000

TTC = $100,000

Salary Midpoint$70,000

$10 000

$20,000

$30,000

$ ,

$0

$10,000

Target Total Compensation includes base salary, commissions and


goal-based bonus payments. Payments for benefits and expenses such as company automobiles are generally excluded.

Target Total Compensation levels are set for each role based on a number of factors

Consider each of these when setting TTC for a role Historical total compensation for those currently in the role Historical total compensation for those currently in the role Total compensation for comparable roles in the company Total compensation hierarchy for those above and below Market pay rates for comparable roles in your competitive

labor market Total compensation needed to attract new people into the Total compensation needed to attract new people into the

role based on recent hiring efforts (difficult or easy?) Any recent attrition of solid or top performers citing pay

G hi dj t t f t ( l it t f li i ) Geographic adjustment factors (rural vs city cost of living)

Surveys such as the TIA Compensation Survey can provide an additional objective data point for setting


provide an additional, objective, data point for setting Target Total Compensation

Pay Mix is the amount of pay in base salary vsthe incentive opportunity at target performance

i$100,000

Incentive at Target$30,000

$70,000

$80,000

$90,000Incentive = $30,000/$100,000

= 30%

Base $40,000

$50,000

$60,000

Midpoint $70,000

$10 000

$20,000

$30,000

$40,000Base = $70,000/$100,000

= 70%

$0

$10,000

With 70% of the TTC in the base salary and 30% in the Incentive,


we say that this plan has a 70/30 pay mix. The more pay determined by incentive (“at risk”), the more “variable” the plan.

Pay variability will be highest for those roles dealing with small, transactional accounts

Small Accounts



Highly variable incentive plans are only suited to roles:

Having direct influence over gcustomers’ buying decisions

Operating with limited team selling or team work (more individually based performance)p )

Where individual performance can be tracked and measured reliably

Required to deliver results so important that incentives are paid

Pay variability (shown in red) decreases with larger, more complex, and fixed rate

important that incentives are paid to those who produce, even in a performance period in which the company misses its goals

That have recruiting profiles accounts.

The less impact a single individual has on the outcome, the more pay should come from salary rather than incentive.

Larger more complex accounts are more

That have recruiting profiles. . . With a tolerance for personal risk Willing to “bet on” their own ability

to be productive Excited by the idea of handsome


Larger, more complex accounts are more likely to be sold, grown, and managed by a team rather than a single individual.

rewards for outstanding results

The pay mix selection is also determined by the desired culture and the available support resources

Pay Mix Pay Mix Base/ Base/

IncentiveIncentiveMotivational ImpactMotivational Impact Sales PerspectiveSales Perspective Management PerspectiveManagement Perspective Operational Support Operational Support

RequirementsRequirements

0/100 Highly motivated to close deals and retain

“I’m running my own business inside this

“I want everyone to run his/her own business and

Exceptionally strong recruiting function and

business – also highly independent

company. The sale is mine, the customer is mine. And if I don’t make good money at this, I have other opportunities I can pursue.”

make a ton of money, just as long as I get my % off the top. I don’t want to have to “manage” anybody.”

good depth in recruiting sources to handle high turn over. Good self-service reporting systems so staff can monitor own progress. Quick & accurate payment of incentives.

50/50 High motivation, with some willingness to accept direction and be a team player within the company

“The base is nice, but I can’t live on it. And if I land the big deal, I’ll be all set for months. Don’t mess with my territory, my opportunities, or my sales goals – or I’m out of

“I want a balance of competitiveness and individual motivation with team work. I want to pay my top performers well, but they need to remember who they work for.”

Good training for new hires, opportunity for career advancement, solid operational systems with limited “roadblocks”. Management’s job is to enable high volume goals or I m out of

here.”they work for. enable high volume

production and mitigate paperwork/non-revenue generating activities.

75/25 Motivated to sell, willing to try new things if management

k h

“Making my goal really matters to me, but if I fall a little short I’ll be OK and

k d

“I want to build a strong and loyal team who will be with me for years and

h ill id lid d

Strong management teams and leadership, a consistent operational

h h d fi d lasks them to stick around – next year could be better.”

who will provide solid and consistent customer service. Top performers should get paid well in good years, if the company makes money I want to share it.”

approach with defined roles and career paths. Annual performance reviews and merit increases necessary as base salary is stronger lever.

100/0 Motivation and “It doesn’t matter what I do, “I’m tired of dealing with the Exceptionally strong


/engagement depend entirely on management

,I’ll make the same amount of money each year, so I just need to be sure I do enough to keep my job.”

gnegativity and wild swings of an incentive plan. I need to know my fixed costs so I can manage my staffing to my productivity levels.”

p y gmanagement, leadership, training, IT and HR systems. Frequent promotions, semi-annual reviews, lots of recognition.

Leverage refers to the amount of upside earned by those who achieve excellence performance levels

Additional Upside

$110 000$120,000$130,000

Leverage $60,000 paid at “excellence”

Incentive at Target $30 000

p$30,000

$80,000$90,000

$100,000$110,000

Incentive at Target

$30,000/$100,000 = 30%

g$60,000/$30,000 = 2.0

LEVERAGE FACTOR

Base

$30,000

$40 000$50,000$60,000$70,000

at Target

Midpoint, $70,000

$10,000$20,000$30,000$40,000

Base = $70,000/$100,000

= 70%

$0

The full leverage amount is earned by those in the top 10% of performers

The very top performers may earn more than the full leverage amount (if the


y p p y g (plan is uncapped)

Generally, the higher the percent of pay “at risk,” the higher the leverage factor

180%

Additional Upside100%140%

160%

180%

mpe

nsat

ion

Incentive at Target, 15% Incentive at Target, 25% Incentive at Target,

Additional Upside, 7.5% Additional Upside 25%

80%

100%

120%

rget

Tot

al C

om

Base Midpoint85% Base Midpoint

75% Base Midpoint50%

g50%

20%

40%

60%

% o

f Ta

r

50%

0%

20%

15% at riskLF = 1.5

25% at riskLF = 2.0

50% at riskLF = 3.0


Once each decision has been madefor each role, you have a pay structure

Role TTC %Base

% Incen-tive

Min Base

Mid Base

Max Base

Target Incentive Comp-

i

Lever-age

ExcellenceIncentive

Excellence Total Comp(using Mid B S l )tive ensation Base Salary)

OutsideSales $100k 50% 50% $40k $50k $60k $50k 3.0 $150k $200k

CSR $60k 60% 40% $29k $36k $44k $24k 2.5 $60k $96k

Truck Finder $48k 75% 25% $29k $36k $44k $12k 2.0 $24k $60k

Project Coord-i t

$48k 90% 10% $34k $43k $52k $5k 1.5 $7.5k $50.5kinator

Salary Bands provide opportunities for

career growth and ensure consistent

Target Incentive Compensation (TIC) is the amount earned at 100% of quota or the average or expected productivity level.

All figures are illustrative and do not represent

hiring practices It is NOT a maximum or a cap, but the amount that should be earned by 50-60% of employees in a role. 10% should hit excellence.


All figures are illustrative and do not represent recommendations or guidance for any role or title which

may exist in your organization

You will then look back to your roles to determine measures and mechanics . . .

Small Big/Complex Project/Fixed

SALES MANAGER

OPERATIONS MANAGER

AGENT MANAGER

Less variable, likely to include company-wide measures for cross-team collaboration, avoid over-rides, consider long-term mechanics to encourage retention & growth.

Highly Variable

Commission Approach

Highly Variable

Commission and Bounty

New Customers

Small Accounts


Less VariableHigh Salary

Bounty and Team-Based


FIND TEAM LEADER

BRANCH MANAGER

Approach Likely

and Bounty Combination

Highly Variable

Commission, Goal-Based or

Moderate to Less Variable

Goal-Based and Strategic

ExistingCustomers

Team Based Bonus Likely

Less Variable

Strategic and Customer Service

GROW

High to Moderately Variable

Player/Coach duties will both be represented in plan

Bounty Likelyg

Measures Used

Truck Finders

Variability Depends on Company Philosophy and Org Structure

Moderate to Less Variable

Goal-based plan more

Measures Used

Less Variable

Strategic and Customer Service Measures

MAKE $

represented in plan

Avoid commission over-rides on team member results

Avoid generating likely Measures

“BROKER ” Highly variable if performance can be measured individually, commission or goal-based possible

Credit & Collections

Accounts Payable

Least Variable, tie to binary standards

incentive “pools”


“FREIGHT FINDER ” Highly variable, use of goals may be needed to mitigate annuity effect from existing customers, over-emphasize new customers

Recruiting Training & Development

sta da dsand company performance

Use annual company-wide plan

Introduction to The Cygnal Group

The Cygnal Group is a consulting firm offering expertdesign assistance and high-value ongoing execution ofthe sales planning process. Our consultants facilitatedesign teams of leaders from Sales Finance HR and IT indesign teams of leaders from Sales, Finance, HR and IT indesigning variable compensation plans and target-settingprocesses aligned with business imperatives. Our offeringincludes ongoing services supporting clients’ salesplanning and sales compensation management processesthroughout the year, year after year.throughout the year, year after year.

Incentive Design Technical Expertise

Communication ExpertiseWe are specialists in delivering compensation as a management tool. Our capabilities include developing communication strategies, messages and content to ensure your compensation plans create motivation and excitement among your employees. In addition, we f tl id t i i t h l fi t l l k th The Cygnal Group has significant experience in incentive compensation

design for all types of sales organizations. The technical expertise extends to ensuring a successful link between your overall business objectives, sales and marketing strategy, and sound incentive design principles.

Our consultants are recognized experts in incentive design, with recent speaking engagements at The Transportation Intermediaries Association Conference, The Synygy Conference, authorship of articles in Workspan,

frequently provide training to help first-level managers make the most of the coachable moment when the new plans are first rolled out.

Robust & Flexible Incentive Design and Modeling ToolsOur proprietary Excel-based plan design and modeling tool enables real-time design during Design Team meetings. The plan model enables the Design Team to keep an eye on the implications of the d i f b th i di id l d th ll b i lt k and The Sales Compensation Quarterly, and a recently-published white

paper on the challenges of administering incentives (“Drive Business Results Through Successful Incentive Administration,” PeopleSoft White Paper Series).

Goal Setting ExpertiseMost incentive plans in use today, and most of the ones we recommend, depend on well-set goals to be effective. We understand goal setting, goal ll i d h l i d ff i i l

design for both individuals and the overall business results as key parameters are set and changed and the plan is “tuned.”

Incentive Administration ExpertiseWe frequently assist clients with a variety of tasks in this area, from reengineering processes, developing specialized Excel tools, and offering a full administration outsourcing solution to using our familiarity with your plans and the EIM market space to facilitate the

l ti f h t d i t ll d l ti d i i t ti


allocation, and the goal setting process, and offer services to improve goal quality ranging from best practices presentations to full goal setting process facilitation.

selection of hosted or installed sales compensation administration software. We can also assist with administration on various EIM platforms.

We work with clients of all sizes, private and public,across all industries, bringing solid domain expertiseto bear on your unique sales compensation issues

AMCOL Integrity Logistics

l

Some of the clients our consultants have served include:

Ameri-Co Carriers & Logistics

Bank of America / MBNA

Blakeman Transportation

Bosch Automotive

Irving Oil

JH Rose

Kalsec

Kohler

Bosch Power Tools

Cardinal Health

Choptank Transport

Comcast

Maritz

Misys/Healthcare and Banking

Morton Salt

Pitney Bowes Comcast

CRST Logistics

Dart Advantage Logistics

Dealertrack

Pitney-Bowes

Red Hat Software

Reynolds & Reynolds / Automark

Roehl Transportation

Express Scripts

Fifth Third Bank

Flynn Transportation

Herman Miller

Solae

Stryker Navigation

Trustmark

US Bank

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Herman Miller

Home Depot Supply

21

US Bank

While we answer some of your questions, here is the email for the 20/20 offer

We will provide 20 minutes of free consulting to the fi t 20 ti i t h il tfirst 20 participants who email us at:

[email protected]

Beth can be reached at: [email protected]@cygnalgroup.com

815-485-4711

Brenda can be reached at:Brenda can be reached at:[email protected]

847-562-2122


End

T H E C Y G N A L G R O U PMaking your numbers . . . better.

Documents

Incentive Comp For The T&L Industry Part 1