SixCompensationMistakesBethCarroll|Prosperio Group

Agenda

• BriefIntroductiontoProsperioGroup

• ReviewSixCommonCompensationMistakes

• Q&A

IntroductiontoProsperioGroup

ProsperiohelpsSupplyChaincompaniesusecompensationstrategicallytodriveprofitablegrowth

BusinessObjectives&Strategy Organization

Structure&Roles

Hiring,Training&

Development

ProcessManagement&

Execution

Compensation

SupplyChainExperience:l WeareorhavebeenmembersoftheTIA,TCA,TMSA,NCBFAA,NITL,IANA,IWLA,

WERC,NASTC,AFA,andtheCSCMP.

l WehavepublishedarticlesspecificallyoncompensationfortheT&LindustryinTheLogisticsJournal,Overdrive,TheSupplyChainQuarterly,andhavegivennumerousspeechesandwebinars.

l BethCarrollistheChairoftheTIACompensationSurveyCommitteeandparticipatesontheTIAFoundationBoard.

l Wehaveworkedwithcompanieswhoprovidethefollowingservices:

l Non-assetbasedtruckbrokerage(allmodes)

l Contracted3PLservices(freightmanagement,consolidation,deconsolidation,supplychainoptimizationandsupport)

l Trucking

l Movingandstorage

l Oceanfreightshipping(FCL,LCL,freightforwarding)

l Intermodal

l Warehousing

l Weworkglobally,havingcompletedengagementsin8countriesforcompanieswithemployeesworkingin39countries.

ProsperioGroupalsoprovides:

• SalesCompensationConsultingacrossallindustries

• Broad-basedCompensationandPerformanceManagementConsulting

• CustomCompensationandBenefitsSurveyDevelopmentandAdministration

Wehaveextensiveexperienceacrossindustries,buttheclearfocusisSupplyChain/Transportation

Somecompaniesarerepresentedinmorethanonesegment

151

22

12

8

8

86

5 3 2

1 1 111

DISTRIBUTIONOFINDUSTRIESSERVED

Transportation

Manufacturing

Food&Beverage

ProfessionalServices

Software

Banking/Insurance

Energy

Medical/Health

Distribution

Telecom

FinancialServices

Waste

Hospitality

Marketing

Printing

110

2530

18

16

47

318

TransportationCompaniesbySegment

Brokers

Freight Forwarders

3PL/FreightMgmt/OutsourcingOcean/Air Asset & NVOCC

Other T&L

Commercial Trucking

Private Fleet Trucking200ClientsarefromBeth’s20yearcareerasabusinessandcompensationconsultant;

41from10yrswithTowersWatsonand159from10yrswithCygnalandProsperioGroup.

Wehaveworkedwithstart-upsaswellasindustryleaders

9

28

33

51

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45

11

0-$2m $2m-$10m $10m-$25m $25m-$100m $100m-$500m $500m-$1b $1b-$10b >$10b

DistributionofClientsbySize(usingRevenue)

We’veworkedwith151T&Lcompaniesinthelast10years,andmanyother“generalindustry”companiesinthelast20years

T&LCompanies: TruckingCo's OtherIndustries:Brokers v ABFFreightv ABFMultimodal v MajesticTransportation v BarneyTrucking Banking/Insurance Manufacturingv AMTransport v OverdriveLogistics v BarberTransportation v BankofAmerica v AMCOLAsiaMineralsv Ameri-CoLogistics v PepsiLogisticsCompany v BennettInternationalGroup /MBNAMerger (Thailand,China)v BartonLogistics v PinnacleFreight v BrownIntegratedLogistics v FifthThirdBank v AMCOLPaper(UK)v BeckerLogistics v RyderFreightManagementGroup v CalArk v PNC v AMCOLAustraliaPtyv BlakemanTransportation v TandemLogistics,Inc. v Con-wayFreight/Truckload v USBank (Australia)v BlueRibbonTransport v TaylorDistributing v GallanoTrucking Food&Beverage v AMCOLHQ,HPC,v BM2 v TrinityTransport v HillBrothersTransportation v CaitoFoods Bio-Ag,MPGv BNSFLogistics v TrafficTech v Nussbaum v ED&FMan v BoschAutomotivev BreckLogistics v TrekFreight v Pride v Kalsec v BoschPowerToolsv BurrisLogistics v TuckerWorldwide v RoehlTransport v PerdueFarms v CETCOLiningTechnologiesv CargoBarn v USXpress v SAIALTL v Solae v Dur-A-Flexv ChoptankTransport v ZMac v SecureLandTransport v WellsDairy(Co-Op) v ElsterSolutionsv CMTS v USXpress Healthcare v HermanMillerv CRSTLogistics Standalone3PLs(FreightMgmt) v ExpressScripts v Kohlerv DARTAdvantageLogistics v Kingsgate PrivateFleets v StrykerNavigation v Poly-Onev DesMoinesTruckBrokers v Land-LinkTrafficSystems v CozzziniBros v Trustmark v Siegel-Robertv DoverServices v M33 v EastPenn v CapitalBC/BSPA v WilliamsAdvancedv EagleTransportation v SheerTrans v Havertys ProfessionalServices Materials(Taiwan)v EnterpriseTruckBrokers v SunsetTransportation v McLaneFoodService v Martizv FastmoreLogistics v UniversalTrafficService(UTS) v SoutheastFrozenFoods v Today'sStaffing NotforProfitv FetchLogistics v Wegmans Software v CONNStepv GlenRoseTransportation FreightForwarders v USFoods v DealerTrack v TCAv GlobalTranz v ABFGlobal v Reynolds&Reynolds v TIAv GTO2000 v APLLogisticsGlobalSales(Singapore) 4PL,SupplyChainorSpecialized Otherv IntegrityLogistics v HannicFreightForwarders v APLLogistics v Comcastv JHRoseLogistics v PantherExpedited v LegacySupplyChain v IrvingOilv Kenco v RedArrowLogistics v MENLO v PSEGv L&LFreightService,Inc. v SprintForwarders v PenskeLogistics v Starwoodv Landstar v TrinetTransportation(Canada) v SterlingTransportation v WasteManagementv LogisticsGroupInternational v TimeLogistics

Transportationcompanieshavemanyrolesthatbenefitfromsoundincentivedesignpractices,herearejustafew…

Trucking/Delivery Brokerage,FreightForwarder 3PL, Int’lLogistics

Drivers(Regional,Team,Solo)DriverSupervisor/ManagerContractorRelationsOutside SalesDriverRecruiterLoad PlannerDispatcherCustomerServiceKeyAccountManagerOwnerOperatorManagersOpsManagerSalesManagerWeigh&ReweighAnalyst/ManagerTireManagerTransportationSupervisor/ManagerLinehaulClerk/Supervisor/ManagerOperationsSupervisor/ManagerTrainingSpecialistMaintenanceManagerShopSupervisorSecurityInvestigatorClaimsPreventionManagerPackagingEngineerOfficeSystemsSpecialistTerminalClerkBranchManagerInsideSales

OutsideSalesFreight FinderAccountManagerTruckFinderInsideSalesTeamLeaderOpsManagerBranchManagerSalesManagerTerritoryManagerVertical DirectorLogisticsProfessionalNetworkLoadPlannersAgentLoadPlannersTruckloadPlannersFlatbedPlannersCarrierRelationsGlobalForwardingAgentStationManagerTrackandTraceOrderEntryGlobalForwardingManagerPricingManagerA/RClerkA/PClerk

Outside SalesInsideSalesLeadGeneration/AptSettingRolesPricing/SalesSupportCustomerServiceOperationsTeamLeaderOps ManagerSalesManagerAuditSpecialistBusinessUnitLeader

Wehavedevelopedincentiveplansforalloftheseroles…andmore.

ProsperioGroupadministersthebiggestcustomtransportationintermediarycompensationsurvey

• MeasureUpSurveys™representsthelargeston-linecompensationsurveyfor3PLs;ourneweditionisjustcompletedandhas:• 5,500+Incumbents• 80+participatingcompanies• 44+positionswithreportabledata

• Dataisreportedfor4experiencelevels(Entry,Intermediate,Advanced,andSenior),plusaconsolidatedcategory

• Datacanbesegmentedbygeographicregionandcompanysizeandspecialization,wherereportedstatisticsallow

• Seehttps://prosperiogroup.com/what-we-do/products/measure/ formoreinfo

• Wealsohavesurveydatafortruckdrivers,driverrecruiters,mechanics,forkliftoperators,selectorsandfreightforwarders.

SixFatalCompensationMistakes

Thevarietyofincentivecompensationplansusedbycompaniestodayismindboggling…StraightcommissionplansGoal-basedincentiveplansBountiesTeam-basedincentivesIndividualincentivesShort-termincentivesLong-termincentivesPiecerateorcomponentplansMileageorhourlyplansSafetyorperformancebonusesProductivitystandardplansEtc.

However,therearesixfatalsalescompensationmistakescompaniesmake

1. Notrealizingthatincentivecompensationispartofacomplexandinterconnectedsystem

2. Thinkingthatincentivecompensationisonlyaboutmoney

3. Notthinkingaboutunintendedconsequences4. Payingtransactionallyandexpectingtogetgrowth5. Thinkingthateverythingyoudoislegal6. Nottakingitseriouslyandfollowingthrough

#1– IncentivecompensationisonepartofaBIGPICTURE;designinginisolationisaHUGEmistake

Yourincentiveplansmustbealignedwithandsupportyour…

• BusinessObjectives&Strategy• OrganizationStructure&Roles• CompanyCulture• DesiredPositionintheLaborMarket

• Youneedtodefinethesethingsbefore evenconsideringacommissionormileagerate!

BusinessObjectives&Strategy Organization

Structure&Roles

CompanyCulture

DesiredPositionintheLaborMarket

Compensation

#2– Incentivecompensationisaboutmorethanmoney

EmployeesexpecttobepaidHowyouchoosetodeliverthatpaysendspowerfulmessagesaboutwhatthecompanydesiresandvaluesConsiderthesetwoalternativesforpayingsalesreps:

• CompanyA:100%salarywithdiscretionaryyear-endbonus• CompanyB:100%commissionwithstrictrulesaboutclawbacksanda“charge”totheemployeewhensupportresourcesareadded

Whatimpressiondoyouhaveaboutthesetwocompaniesfromjusttheircompensationplans?Whatdoesyourplansayaboutyou?

Focusingtoomuchon“fair”oftenmissesthepoint…• Anemployeeshouldnotgetanincentiveforeverythingtheydo;creditsplittingandadministrationcanbecomeanightmare!

• Reconcilingadjustmentstothepennyisverylikelyawasteoftime,moneyandmotivation(besureyouknowwhatyouarelosing!)

#3– Incentivecompensationdesignisaconstrainedoptimizationproblem;therearerisks!

Foreverygaininanincentivecompensationplan,thereisacorrespondinglossFindingtherightbalanceforyourcompanytakesconsiderablethoughtandWORK• Ifyouthinkincentivecompensationiseasyor

thatanyonehasamagicanswerthatworksforeveryone,youaredeludingyourself

Youalsoneedtothinkabouthowyourbusinesswillchangein5,10,15yrs…areyousettingyourselfupforfutureproblemswiththeplansyouareusingnow?• Hint:ifyouareusinganannuityschemewith

yoursalesrepsorateam-basedpool,theanswerisYES

• Hint:ifyouarelettingeachterminalorDCdeterminetheirownmethodforpayingdriversorwarehouseworkers,theanswerisYES

Gain Lose

Long-TermFocus

StrategicEmphasis

TeamWork

CompanyProfits

Short-TermFocus

FinancialEmphasis

IndividualMotivation

HighPayouts

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CommissionPaid

MonthlyGrossMargin

Retroactive Marginal FlatRate

Bottom Top-$ 9,999$ 0.00% 0.00%

10,000$ 15,999$ 2.00% 5.50%16,000$ 19,999$ 3.00% 7.00%20,000$ 24,999$ 3.50% 8.00%25,000$ 29,999$ 4.00% 8.50%30,000$ 34,999$ 4.50% 9.00%35,000$ 39,999$ 5.00% 9.50%40,000$ 5.50% 10.00%

MonthlyMargin RetroactiveRate

MarginalRate

FlatRate=3.5%

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$2,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Commiss

ionPaid

MonthlyGrossMargin

Retroactive FlatRate

Bottom Top-$ 9,999$ 0.00%

10,000$ 15,999$ 2.00%16,000$ 19,999$ 3.00%20,000$ 24,999$ 3.50%25,000$ 29,999$ 4.00%30,000$ 34,999$ 4.50%35,000$ 39,999$ 5.00%40,000$ 5.50%

MonthlyMargin RetroactiveRate

FlatRate=3.5%

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$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Commiss

ionPaid

MonthlyGrossMargin

FlatRate

Flatrateshavenoacceleration

• Theonlywaytodoublepayisdoubleproduction

Retroactiveratesareeasytocalculatebutmaycreateoddeconomics

• Itdrivesemployeestoreachthebottomofthenewtier,andmayevenpushthemtounethicalbehavior

• Thecompanylosesmoneyontheloadthatpaysthenewrate

Marginalratesaremorecomplicatedtoexplain,butoftenprovidethebesteconomiccontrolforthecompanyandbestmotivationalvaluefortheemployee

Notethatthepaycurvescanbedesignedtoprovideexactlythesamepayoutattargetperformance(inthiscase$22,000provides$770inpayinallthreemethods)

Thisisanexampleonlyandshouldnotbeusedtodrawanyconclusionsaboutthe“right”monthlymarginproductionpermonthorthe“right”payoutforagivenproduction– thesedecisionsdependonavarietyoffactors,includingcompanytypeoffreight,howmuchiscomingfromsalaryandotherelements(forsome$770amonthonthisincentivewouldbeverylittle,forothersitwouldbealot).ThereisNOrightanswerforallcompanies,andrarelyevenarightanswerthatworksforanytwocompanies.

#4– “MORE”isnotagoal;payingtransactionallyonlytellspeopletodo“more”

#4– Usinggoals,andpayingagainstagoal,makesthegrowthimperativecrystalclear

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NoThreshold(1:1) 50-150_2.5x

A1:1linearincentive(straightline)approximatesaflatcommissionwhileallowingfordifferentgoals

• Theonlywaytodoublepayistodoubleyourperformance

Mostmulti-linearincentiveplanshave3lines• ThresholdtoTarget• TargettoExcellence• AboveExcellence• Thisallowsyoutoscale

payoutstorewardtopperformersmore(andpayunderperformersless)basedonrelativegoalattainment

Thewayyoufigure%ofincentiveearnedisbyusingy=mx+b• Y=amountpaid• M=slopeoftheline• X=%ofgoalattained• B=Yintercept• Youcanalsointerpolate

usingtheslope

Howtointerpolate:Usetheslopeofthelineformula.ChangeinYvaluesdividedbychangeinXvalues.(Y2– Y1dividedbyX2– X1)

ToautomateyouwoulduseExcel’sslopeandinterceptformulas

(100– 25/100– 50)=1.5%ofincentiveforeach1%ofquota

(250– 100/150– 100)=3.0%ofincentiveforeach1%ofquota

Slopeisusually½oftheratepriortoExcellence

TargettoExcellence

AboveExcellence

ThresholdtoTarget

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NoThreshold(1:1)

#5– Believeitornot…thereARElawsaboutcompensation(beyondExempt/Non-ExemptandCADriverHourlyRegs)Insomestates,youcannot“holdback”partofanearnedincentivetoafuturedateasameansofretention(CA,NY,areCTareespeciallyparticularaboutincentivelaws)

• Purgetheword“holdback”fromyourvocabulary- NOW• Rephrasesothatincentivesarenotearneduntilthefuturedatetriggerevent(e.g.,collecting

money,clearingadjustments,payoutsarecalculated,etc.)• Onceanincentiveisearned,itneedstobepaidtotherep;theyhavealegalrighttothat

moneyassoonasyousaytheyhave“earned”it…eveniftheyleavethecompany!• Evenso…recentlegislationinMarylandandIllinoisruledthatcommissionsonbookedsales

werepayabletotherepevenaftertermination,evenwhentheplandocumentstatedthatcommissionswerenotearneduntilmoneywascollectedfromthecustomer

CaliforniaAB1396,whichwentintoeffectJanuary1,2013,requiresallcommissionplanstobeinwritingwithasignedcopygiventoeachemployee

• LackofcompliancecouldbeabasisforalawsuitunderCalifornia’sPrivateAttorneyGeneralAct(PAGA)andUnfairCompetitionLaw

• Notethata“Commission”isnotthesamethingasa“GoalBasedBonus”;CAdefinesacommissionas“compensationpaidtoanypersonforservicesrenderedinthesaleofanemployer’spropertyorservicesandbasedproportionately upontheamountorvaluethereof”

l Because“commissions”triggersuchlegalscrutiny,werecommendavoidingtheword“commission”altogetherandinsteadusingtheword“INCENTIVES”whentalkingaboutanyvariablecompensation

#6– Youcan’t“half-ass”yourcompensationplanandexpectittowork100%foryouWe’veworkedwithhundredsofcompanieshelpingthemdevelopnewincentivecompensationplans

successdependsononethingandonethingonly…YOU NEEDTOOWN YOURCOMPENSATIONPLAN

Thismeansthatyou(andyourleadershipteam)…• Understandit…ALLOFITandALLOFITSIMPLICATIONS• Knowwhyitisthewayitis…youknowthetradeoffdecisionsmadeandcanexplainthese

decisionstoothers(noplanisperfect)• Knowwhatdataisneededtosupportitandhaveresourcestogetthedataregularly• Havetestedthedataagainsthistoricaldatasoyouknowwhattypeofpayoutstoexpectbothin

aggregateandforeachindividualandatdifferentlevelsofperformance(low/high)• Usecarewhensettinggoals– thispartespeciallycannotbehalf-assedoryouwillblowupyour

planeconomicsandthencomebackandtellustheplanis“broken”,whenitisn’t…thegoalsare!• Havecommunicateditthoroughlytoyourstaff,withexamples• Provideregularreportsonprogressandcoachstaffonhowtoimproveperformance• Don’tchangeitatthedropofahatorwithoutadequatedataorresearch– useSOPguidelinesfor

on-goingstrategicmanagement(wecangiveyouasample)