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Freight brokers are companies that act as intermediaries in the moving of freight throughout the United States. They agree to move freight for a shipper for a fee and then find a carrier who will move the freight for an amount that is less than the fee the shipper is paying the broker (hopefully). You can think of this as buying capacity from a trucking company at a low price, then adding value-added services to that capacity and selling it to a shipper at a higher price. Brokers collect money from shippers (revenue) and pay money to carriers (purchased transportation) and retain the difference (margin/profit) to run their businesses. Generally, a broker owns no assets (trucks) but may be connected to an asset provider, or they may own a few assets. The roles used as examples in this book are those found at typical non-asset, spot-market brokerage organizations. Companies that provide asset-based services or full transportation management services, such as full LTL (Less Than Truckload) shipping management, TMS (transportation management system) services, and freight bill auditing, will certainly find the material herein valuable, but some adaptation will be needed to apply these concepts to those types of roles.

The challenge many brokers face when managing their compensation arrangements is to accomplish these objectives within a system that is “fair.” If you use a highly variable plan delivered via a flat commission rate, is it fair to pay an employee the standard commission rate for moving freight for a large contracted account they didn’t land? What about for freight that is generated by an outside salesperson—shouldn’t there be a reduced rate on these loads? What if you are using a team approach that generates a shared pool, but now you need to add people to the team? Or you need to move your best team leader to another group that is substantially smaller because you know he or she will be able to grow it?

In each case, if you stay wedded to using a highly variable commission-only approach, you will find yourself creating “special deals” in which certain accounts are paid a lower (or higher) rate than others, in which you are administering cumbersome calculations to deduct the “lead generation” fee before calculating the commission, or in which you are creating temporary “deals” with employees as you reorganize your staff or your accounts. You may find yourself spending more time trying to remember the different compensation arrangements you have for Joe, Sally, and Fred, and what the rates are for accounts A, B, and C, than you spend building relationships with your customers.

Using the traditional, highly variable, straight-commission approach for incentive compensation is appealing on many levels: it’s simple, easy to understand, it’s economically “pure” so you don’t have to worry that you’re going to spend all your profits on incentives, and it’s easy to administer (at least at first). For busy business leaders, this approach feels like it should be a “fix-it-and-forget-it” solution. In addition to these benefits, the commission mechanic (regardless of how much pay is at risk in the plan) is a powerful tool that creates an intensity of focus you generally don’t find with other compensation mechanics.

For these reasons, using a highly variable pay plan, with a commission mechanic to calculate pay, is perfectly appropriate for some selling roles and in some selling situations, especially for pure new-business-hunters in start-up companies or high-growth divisions of established companies. These types of roles have what is called “high prominence,” which means, in plain language, that they have a high degree of control over the outcome of their sales efforts. (I would still suggest using an escalating or de-escalating commission mechanic even for these roles, however, as it’s rarely appropriate or advisable to base an entire incentive plan on a single, unchanging commission rate.)

What is a Goal-Based Incentive Mechanic (aka “Bonus”)?

Commissions pay for volume (“the more you sell, the more you make”). Goal-based bonuses pay for attaining a predefined goal (“if you beat your goal, you make more money”). Using goal-based incentive mechanics can provide more flexibility for managers to run their business to meet customer needs, target strategic objectives beyond gross profit, and manage employee pay as a motivational tool.

An example might help illustrate the difference.

Joe, who has been given a large volume of mainly long-standing accounts, generates $30,000 in profit in this month. This is down 25 percent from what he did the last month.

Sally, who is still developing her book of accounts, generates $15,000 this month, which represents 150 percent growth over what she did the last month.

A pure-commission mechanic would pay Joe twice as much as Sally, even though his business is shrinking and hers is growing. Arguably, Sally is doing a better job than Joe, even though (and I can hear many of you saying it) “Joe is still bringing more money into the company.” Yes, he is. But, once a company grows beyond the point of living hand-to-mouth in start-up mode, management needs to think strategically in terms of what behaviors and results should be rewarded for the long-term growth of the company. Sally could very well be a better long-term asset, but she may not stay around too much longer if her pay is below market-competitive levels (and also very likely perceived by her as being “not fair” compared to what “that slouch, Joe” is making).

Using a pure goal-based mechanic, Joe might be given a monthly goal of $35,000 per month in profit, and Sally a goal of $12,500. Management would make this determination based on previous-period performance, opportunities for growth, and the overall numbers that must be hit by the organization. At 100 percent of goal, each would make $1,000 for the month. A well-designed goal-based plan has a range around goal (called a performance range) which allows for payout both below and above goal, with different escalation rates. At $30,000, Joe would be at 85 percent ($30,000/$35,000) of his goal, and he might be paid 77.5 percent of his target incentive, or $775. At $15,000, Sally would be at 120 percent ($15,000/$12,500) of her goal, and she might be paid 140 percent of her target incentive, or $1,400. This provides a payout that is determined by the individual’s ability to meet and exceed the goal that management has set for him/her. Next month, when management decides that Sally might do a better job managing one of Joe’s accounts, Joe’s goal would be reduced and Sally’s would be increased to reflect this shift in accounts. Each of their incentive targets would still be $1,000 for 100 percent of goal attainment. Management can make this decision purely based on what is in the best interests of the customer and the company, without fear that this kind of change is taking pay from Joe and “giving it” to Sally. Instead, the discussion is entirely about who is best suited to manage and grow this particular account.

For those of you who may feel that the pure goal-based approach is not quite right for your business, or it’s too much change to take in one step, there is the comforting fact that there are hundreds of different ways to design incentive plans. One of these options is to use a goal-based commission mechanic in which the commission rate increases when the individual’s goal is attained. This provides a blend of reward for volume and reward for goal-attainment. Another option is to divide the incentive into two (or three) elements, one of which is paid using a commission mechanic, and the other of which is paid using a goal-based mechanic. Some companies elect to transition by using the goal-based mechanic on a lesser-weighted team measure, leaving the commission mechanic on a more heavily weighted individual measure. The possibilities are truly endless, and by moving beyond the traditional broker method for compensating their employees, many companies are finding answers to some of their most vexing compensation problems.

The second variation of this mistake is to develop compensation plans for highly interconnected roles separately from one another. I am often asked for a plan for sales, or for carrier coordinators, or for account managers because that may be a particular pain point at the moment. It is likely, however, that a change to the incentive plan for any one of these roles will have a ripple effect on the other roles. It’s not easy, but the right way to develop new incentive plans is to consider all of the roles in your organization at once so you can be sure the plans encourage people to work together and not against each other.

Also, it is essential to do the economic modeling for the full system at once to be sure the total cost of compensation lands in the right range for where your company is in the life cycle and the type of freight you have. (TIP: 33 percent is often cited as the “right” cost of compensation as a percent of gross profit, but it is not the only answer, nor is it the right answer for all companies; companies with a large volume of contract or EDI (electronic data interchange) freight could be much lower than this, while start-ups, small companies or companies dealing in over-dimensional, heavy-haul or other “high-touch” or specialized freight could be higher and still be perfectly healthy.) chapter 19 goes into detail on what you can learn through economic modeling that will help you fine tune your compensation plans for maximum return-on-investment (ROI).

Compensation is about more than money, and those who think about only the math are missing at least half of the point. I tell clients that using an incentive plan is like putting a megaphone on your business strategy. Whatever is in the incentive plan will get a disproportionate amount of attention from employees, so isn’t it sensible to spend some time thinking about the message being sent? The plan shouts to employees the company’s priorities, ethics, team philosophy, how valuable they are (or aren’t) to management, and how many opportunities they have for growth and advancement. Getting the psychology of incentives right is at least as important as getting the math right.

Another mistake in this category is to think about incentive compensation only from the perspective of “how much can I afford to pay.” In the sales compensation world, this is called a “cost-of-sales” philosophy. As organizations mature and cash flow becomes less of a concern, management recognizes that knowing the market value of a job is important to attract and retain the type of talent they want. This is called a “cost-of-labor” philosophy and is used by all sophisticated companies once they reach a certain maturity and size. It is at this point that compensation surveys become very important as companies look to the market to understand what is required to pay a competitive wage (and what isn’t). chapter 6 will give you more insights into the proper use of compensation surveys. In some cases, companies will find they are overpaying the market due to legacy issues from the plans they put in place during their start-up phase (see Mistake #3). Developing an understanding of what other companies are paying for the same roles can give management the confidence needed to make adjustments.

Another economic mistake is to think that if a little incentive is a good thing, then a lot of incentive must be better. It is rare that paying 100 percent variable pay to employees (e.g., 100-percent commission plan) is a good thing. Employers lose almost all control when an employee has no salary. The employees may engage in practices that are detrimental to the company’s business, customers, carriers, and ethics. The employees are also more likely to jump ship with “their” customers (excuse me, whose customers?) and go for a better offer or start up their own brokerage based on the training, marketing, and technological support you gave them.¹

While a bit of hunger can be a good thing to drive performance, desperation is rarely an effective motivational tool for the long term. If you want your employees to act like used car salespeople, or to run your business the way subprime mortgage brokers ran theirs, then by all means, use a 100-percent variable approach. (TIP: AIG and Lehman Brothers were big success stories once upon a time and everyone wanted to know their secrets (see Mistake #1). One of those secrets was a highly variable and highly leveraged incentive plan that rewarded excessive risk-taking and was a proximate cause of the economic collapse of 2008.) If you want an organization with more class than a used car dealership and less risk than a subprime mortgage brokerage, then you will likely need to have some part of your employees’ pay coming in the form of a fixed salary. chapter 4 will give you more insights into the varied psychology behind compensation, and chapter 5 will help you work through the options for selecting the proper pay mix for your different roles.

Companies also get so focused on the economics of compensation that they will spend dollars to save pennies, losing sight of psychological costs and benefits. The best example of this is the development of expensive administrative systems to track adjustments and short pays. Provided you have systems in place to prevent egregious errors, there are usually better solutions than holding back, charging back, clawing back, or otherwise demotivating your employees while trying to satisfy some overly heightened sense of fairness and economic precision. (TIP: In some states these practices are actually illegal. See Mistake #5.) You are losing hundreds, maybe thousands, of dollars in lost opportunities tracking and arguing over these issues. Would you rather have your employees on the phone getting new customers, or in your accounting department asking to reconcile every load on their last check? chapter 12 will help you consider options for the appropriate crediting point to optimize the balance between financial risk and employee motivation.

Related to this point, companies often struggle with paying incentives when the company has not hit its profitability goals. This requires a shift in thinking from incentive pay as “profit-sharing” or a “bonus plan” to an integral part of your employees’ total compensation package. For incentives to be motivational, they must become part of the expected pay package and employees must be able to predict their pay in advance and be able to affect the outcome through their own efforts. Just as your employees’ base salary is not dependent upon your company hitting its EBIT goals, neither should their incentive compensation (except for the highest levels of management). Incentive compensation is a strategic investment made to get results, and if you withhold that pay from your top performers in a down year, then it is likely that your results will be even worse the next year because you will have taught your key people that working hard and getting results doesn’t matter.

Short-term consequences from ill-designed incentive plans typically involve damaging customer and/or carrier relationships and damaging employee interactions. For example, if a plan puts too much pressure on profit percent, you might find your employees negotiating too hard with your customers or carriers and costing the company current business, and worse—the opportunity for future business. Likewise, if a plan rewards only individual performance, then employees may work against each other to maximize their own paychecks. Some familiar examples are carrier reps not letting their colleagues know about available trucks (truck hoarding) or changing the code on a load to their own. I’ve even heard of reps “paying each other” for loads. If any of these things are happening in your office, you have a problem with your incentive plan.

Long-term consequences are harder to anticipate because, by definition, the effects do not manifest themselves for months or even years. The most common long-term consequence is sacrificing long-term growth for short-term gain. This is often found among Branch Managers whose incentive plans pay a percentage of profit. Branch Managers may resist hiring employees under this type of plan, as they will inevitably take a short-term hit in their incentive compensation while they train the new employee. Everyone will agree that in the long run the branch will increase in performance, but managers rarely have the kind of long-term vision as entrepreneurial owners; they are worried about their mortgage and the next car payment. Owners are more willing to take risks than employees, and they are more likely to see the long-term benefit from making “investment” decisions. Hint: If your employees were willing to take these kinds of risks, they wouldn’t be working for you.