Many providers of supply chain services compensate their sales force using approaches that are more suited to start-ups than to mature, established businesses.
Beth Carroll, CCP, GRP, CSCP, is a principal with The Cygnal Group, a con-sulting firm that helps companies design, communicate, and manage their sales compensation plans.
Designing effective sales compensation is an art. When done well, it enables companies to develop the right mix of individual motivation and teamwork while balancing the needs for both short-term financial gain and long-term strategic positioning. When done poorly, however, companies can end up creating at best a culture of complacency and entitlement, and at worst a culture where sales representatives are working to maximize their own incomes to the detriment of the company.
Many providers of supply chain services, such as transportation brokers, customs brokers, freight forwarders, warehouse operators, third-party logistics companies, and carriers, compensate their sales force using approaches that are more suited to start-ups than to mature, established businesses. By using the best practices outlined in this article, these types of companies can maximize the return on their sales investments and become stronger competitors.
Don't pay more for less work
Providers of supply chain services tend to approach incentive compensation from a simplified, "cost of sales" viewpoint. After determining how much they think they can afford to pay for the sale of a particular product or a service, they establish a straight-line commission plan—for example, 5 percent of margin for truckload brokerage or 0.5 percent of revenue for third-party logistics (3PL) services. They then pay that percentage for as long as the salesperson and the customer remain with the company.
This approach may work for start-up companies, but it quickly falls apart for high-growth or mature organizations that invest large amounts of money in marketing, advertising, customer service and support, technology, training, and other programs that build brand awareness and help to attract and retain customers. That's because the "cost of sales" approach fails to take into account the fact that these programs also have the effect of reducing the effort a sales representative must put forth to secure and retain customers. In fact, the contributions of other employees may have a greater impact on customer retention than those of the sales representative, who perhaps only gets involved with the customer when it's time to renew the contract.
For example, if a company starts by paying its sales staff 10 percent of revenue and continues this approach as the company grows, it could end up paying more than the market rate for similar positions. Furthermore, it will be compensating sales representatives at the same level for what is likely to be less work. As a result, the company risks creating a complacent sales force that does not bring in enough new customers.
Three best practices
To avoid developing a complacent sales force, companies need to shift from the start-up "cost of sales" mentality to a more mature "cost of labor" approach. To accomplish this, it's important to follow three best practices in sales compensation design:
Set the target total compensation (TTC) based on current market value
Match the pay mix to the sales role
Design pay elements to provide the right balance
To start then, companies need to determine the market value for each sales job. This ensures that they will be able to attract and retain top talent without overpaying or creating a disincentive for newclient acquisition. There are many market surveys available that can help you benchmark pay levels, but be sure to look at "actual total compensation" (or "target total compensation" if actual is not available) and not just salary to get the full picture for a sales job. Total compensation is important because the salary may be only 50 percent of the compensation package, and the portion that comes from incentive compensation (commonly called "sales commissions") can vary greatly from one company to another.
Similarly, benchmarking based on commission rates alone is a mistake. In the logistics industry, one company may pay a higher portion in salary and have a lower commission rate for a given product or service, while another company may offer a lower salary but a higher commission rate. Further, well-designed plans should have other variable elements besides commissions; for example, a commission rate based on margin may be offset by a bounty for new business acquisition.
Once you know the industry baseline, set the pay mix based on the nature of the selling role. "Pay mix" refers to the portion of target total compensation that comes from salary (fixed pay) versus incentives (variable pay). Not all selling roles in an organization should have the same pay mix. The more direct and personal control the sales representative has over the outcome of a sales call, the more compensation should come from variable pay (incentives) rather than from fixed pay (salary). When other factors, such as high brand awareness, low price, limited product availability from other sources, aggressive marketing promotions, or high switching costs weigh heavily in the customer's decision to buy (or keep buying), the salesperson is less directly and personally responsible for the revenue from the customer, therefore less compensation should come from variable pay and more should come from fixed pay.
Generally speaking, "hunters," or salespeople who focus on gaining new accounts, should have more variable pay than "farmers," or account managers who focus on maintaining and growing existing accounts. Most customer support roles have the least amount of variable pay of all.
After determining the right mix of variable and fixed pay, companies need to make sure the elements that determine incentive pay provide a balance between financial and strategic objectives, individual and team effort, and shortand long-term focus. An element is the combination of:
performance measure (the metrics used to judge performance; for example, revenue, number of new customers, or percentage of margin);
scope (the level of aggregation at which performance is measured, such as individual, team, region, or company);
performance period (what time horizon determines the start and end for sales credit);
pay frequency (how often incentives will be paid); and
mechanics (what mathematical formulas will be used to calculate pay).
Well-designed incentive plans like the example in Figure 1 include more than one measure of performance. The bestdesigned plans have three elements, but a case can be made for using two or four elements in some circumstances. Going beyond four makes it difficult for the sales representative to give adequate attention to all parts of the plan, and he or she may decide to focus only on those elements that will make the most money and ignore the rest.
By following these three best practices in sales compensation design, companies can maximize the return on their investments in what is likely a very large part of their selling, general, and administrative (SG&A) budget. Additionally, the right design can help companies position themselves for increased growth and improved strategic position relative to their competitors, whether they are competing for customers or for top sales representatives, or both.
Calculating sales compensation: What's the right formula?
The mechanics (mathematical formulas) used to calculate pay can be one of the trickiest parts of sales compensation design. The wrong mechanics can lead to payouts that are either too high or too low for the performance, or they can create a "phantom" base salary that leads to complacency.
One of the keys to sound mechanics is to use a goal or performance expectation against which the payouts are calculated. A commission mechanic (where a percentage of revenue or margin is paid) is fine for many types of hunter (new-client acquisition) roles, but it should pay using a lower rate at below-target performance and a higher rate at above-target performance. It should also avoid creating an "annuity" whereby a representative can make a sale, hand over the account to someone else, and continue to generate income from that sale for years to come. Hunters need to be rewarded for hunting!
Be careful, too, of using a retroactive commission rate (where the higher rate applies back to the first sale), as this plan creates an inverse economic relationship for the additional amount of money that moved the salesperson up to the next compensation level—it costs the company more in incentive pay than it made from that additional sale. This type of mechanic can be highly motivational, but it may also lead to unethical behavior because it offers a disproportionately large additional reward for what could be very little effort.
A goal-based mechanic typically has a performance range in which some pay is earned below goal, but significantly more pay is earned above goal, at a ratio that is typically greater than 2:1. A goal-based approach is often appropriate for account managers or territory managers who have unequal opportunities. Using a goal allows the company to pay the same amount in incentive for the same level of effort, even if that effort does not lead to the same financial result. In supply chain service companies, a goal-based approach is often appropriate when some operations people have inherited large, contracted accounts but others are being asked to solicit and grow smaller accounts. In theory their roles are the same, but the level of effort required to produce the same amount of revenue or profit is very different. If you have different commission rates for different customers (house accounts, contracted accounts, new accounts, and so forth), it may be time to think about shifting to a goal-based approach.
In both the goal-based and the commission approaches, there comes a point where deceleration in the payout curve needs to happen in order to allow for windfalls or unforeseen circumstances where a rep could end up at 400 percent or more of the expected productivity level. Consider the cases where this could happen and plan accordingly. Avoid overall caps if at all possible, opting instead for a decelerated payout curve and perhaps a per-deal cap.
Residents and businesses along the Florida panhandle today are keeping a close eye on Tropical Storm Helene, which is forecasted to strengthen into a major hurricane by the time it strikes the northeast Gulf Coast on Thursday.
Hurricane and storm surge watches are already in effect for that area, which could see heavy rain and flash flooding across portions of Florida, the Southeast U.S., Southern Appalachians, and the Tennessee Valley, according to predictions from the National Hurricane Center.
The storm would come a month after Hurricane Debby delivered drenching rainfall for days over Florida in August and after Hurricane Beryl hit Houston in July, knocking out power across the region.
As Helene continues to gather strength from the warm waters of the Gulf of Mexico, experts are warning that the storm’s impacts could include the Port of New Orleans, agricultural operations throughout the Southeast, and additional citrus and fruit farming business in Florida, according to a report from Everstream Analytics’ chief meteorologist Jon Davis.
From a supply chain perspective, additional disruptions could include rail and road transportation stoppages, closures of interstate highways I-10 and I-75, widespread power outages, and shutdowns of offshore energy operations in the eastern portion of the Gulf of Mexico, Davis said.
As the third potential hurricane to hit the area within as many months, the arrival of Helene shows that extreme weather events aren’t just anomalies, but rather they’re the new normal for shipping companies and port authorities, according to Frank Kenney, Director of Industry Strategy at the technology consulting firm Cleo.
To cope with that constant battering, businesses need to adopt a new mindset, he said. “The only way to keep supply chains running smoothly is to build resilience into every aspect of operations. This starts with diversifying logistics strategies. If a shipper is dependent on a single route or port, they’re setting themself up for trouble. Instead, it’s crucial to have multiple backup routes and options ready to deploy when the unexpected happens,” Kenney said.
Following that strategy, inland ports such as Savannah and Macon, Georgia, will likely gain importance in coming years since their locations offer proximity to ocean ports while also providing access to major highways and some protection from coastal flooding. “In short, the storm isn’t going away, but by embracing diversification, leveraging technology, and ensuring supply chain visibility, U.S. ports and shipping companies can stay ahead of the curve. The companies that prepare for these challenges now will be the ones that continue to thrive, no matter how extreme weather events rock the boat," Kenney said.
Container imports at U.S. ports are seeing another busy month as retailers and manufacturers hustle to get their orders into the country ahead of a potential labor strike that could stop operations at East Coast and Gulf Coast ports as soon as October 1.
Less than two weeks from now, the existing contract between the International Longshoremen’s Association (ILA) and the United States Maritime Alliance covering East and Gulf Coast ports is set to expire. With negotiations hung up on issues like wages and automation, the ILA has threatened to put its 85,000 members on strike if a new contract is not reached by then, prompting business groups like the National Retail Federation (NRF) to call for both sides to reach an agreement.
But until such an agreement is reached, importers are playing it safe and accelerating their plans. “Import levels are being impacted by concerns about the potential East and Gulf Coast port strike,” Hackett Associates Founder Ben Hackett said in a release. “This has caused some cargo owners to bring forward shipments, bumping up June-through-September imports. In addition, some importers are weighing the decision to bring forward some goods, particularly from China, that could be impacted by rising tariffs following the election.”
The stakes are high, since a potential strike would come at a sensitive time when businesses are already facing other global supply chain disruptions, according to FourKites’ Mike DeAngelis, senior director of international solutions. “We're facing a perfect storm — with the Red Sea disruptions preventing normal access to the Suez Canal and the Panama Canal’s still-reduced capacity, an ILA strike would effectively choke off major arteries of global trade,” DeAngelis said in a statement.
Although West Coast and Canadian ports would see a surge in traffic if the strike occurs, they cannot absorb all the volume from the East and Gulf Coast ports. And the influx of freight there could cause weeks, if not months-long backlogs, even after the strikes end, reshaping shipping patterns well into 2025, DeAngelis said.
With an eye on those consequences, importers are also looking at more creative contingency plans, such as turning to air freight, west coast ports, or intermodal combinations of rail and truck modes, according to less than truckload (LTL) carrier Averitt Express.
“While some importers and exporters have already rerouted shipments to West Coast ports or delayed shipping altogether, there are still significant volumes of cargo en route to the East and Gulf Coast ports that cannot be rerouted. Unfortunately, once cargo is on a vessel, it becomes virtually impossible to change its destination, leaving shippers with limited options for those shipments,” Averitt said in a release.
However, one silver lining for coping with a potential strike is that prevailing global supply chain turbulence has already prompted many U.S. companies to stock up for bad weather, said Christian Roeloffs, co-founder and CEO of Container xChange.
"While the threat of strikes looms large, it’s important to note that U.S. inventories are currently strong due to the pulling forward of orders earlier this year to avoid existing disruptions. This stockpile will act as an essential buffer, mitigating the risk of container rates spiking dramatically due to the strikes,” Roeloffs said.
In addition, forecasts for a fairly modest winter peak shopping season could take the edge off the impact of a strike. “With no significant signs of peak season demand strengthening, these strikes might not have as intense an impact as historically seen. However, the overall impact will largely depend on the duration of the strikes, with prolonged disruptions having the potential to intensify the implications for supply chains, leading to more pronounced bottlenecks and greater challenges in container availability, " he said.
A coalition of freight transport and cargo handling organizations is calling on countries to honor their existing resolutions to report the results of national container inspection programs, and for the International Maritime Organization (IMO) to publish those results.
Those two steps would help improve safety in the carriage of goods by sea, according to the Cargo Integrity Group (CIG), which is a is a partnership of industry associations seeking to raise awareness and greater uptake of the IMO/ILO/UNECE Code of Practice for Packing of Cargo Transport Units (2014) – often referred to as CTU Code.
According to the Cargo Integrity Group, member governments of the IMO adopted resolutions more than 20 years ago agreeing to conduct routine inspections of freight containers and the cargoes packed in them. But less than 5% of 167 national administrations covered by the agreement are regularly submitting the results of their inspections to IMO in publicly available form.
The low numbers of reports means that insufficient data is available for IMO or industry to draw reliable conclusions, fundamentally undermining their efforts to improve the safety and sustainability of shipments by sea, CIG said.
Meanwhile, the dangers posed by poorly packed, mis-handled, or mis-declared containerized shipments has been demonstrated again recently in a series of fires and explosions aboard container ships. Whilst the precise circumstances of those incidents remain under investigation, the Cargo Integrity Group says it is concerned that measures already in place to help identify possible weaknesses are not being fully implemented and that opportunities for improving compliance standards are being missed.
By the numbers, overall retail sales in August were up 0.1% seasonally adjusted month over month and up 2.1% unadjusted year over year. That compared with increases of 1.1% month over month and 2.9% year over year in July.
August’s core retail sales as defined by NRF — based on the Census data but excluding automobile dealers, gasoline stations and restaurants — were up 0.3% seasonally adjusted month over month and up 3.3% unadjusted year over year. Core retail sales were up 3.4% year over year for the first eight months of the year, in line with NRF’s forecast for 2024 retail sales to grow between 2.5% and 3.5% over 2023.
“These numbers show the continued resiliency of the American consumer,” NRF Chief Economist Jack Kleinhenz said in a release. “While sales growth decelerated from last month’s pace, there is little hint of consumer spending unraveling. Households have the underpinnings to spend as recent wage gains have outpaced inflation even though payroll growth saw a slowdown in July and August. Easing inflation is providing added spending capacity to cost-weary shoppers and the interest rate cuts expected to come from the Fed should help create a more positive environment for consumers in the future.”
The U.S., U.K., and Australia will strengthen supply chain resiliency by sharing data and taking joint actions under the terms of a pact signed last week, the three nations said.
The agreement creates a “Supply Chain Resilience Cooperation Group” designed to build resilience in priority supply chains and to enhance the members’ mutual ability to identify and address risks, threats, and disruptions, according to the U.K.’s Department for Business and Trade.
One of the top priorities for the new group is developing an early warning pilot focused on the telecommunications supply chain, which is essential for the three countries’ global, digitized economies, they said. By identifying and monitoring disruption risks to the telecommunications supply chain, this pilot will enhance all three countries’ knowledge of relevant vulnerabilities, criticality, and residual risks. It will also develop procedures for sharing this information and responding cooperatively to disruptions.
According to the U.S. Department of Homeland Security (DHS), the group chose that sector because telecommunications infrastructure is vital to the distribution of public safety information, emergency services, and the day to day lives of many citizens. For example, undersea fiberoptic cables carry over 95% of transoceanic data traffic without which smartphones, financial networks, and communications systems would cease to function reliably.
“The resilience of our critical supply chains is a homeland security and economic security imperative,” Secretary of Homeland Security Alejandro N. Mayorkas said in a release. “Collaboration with international partners allows us to anticipate and mitigate disruptions before they occur. Our new U.S.-U.K.-Australia Supply Chain Resilience Cooperation Group will help ensure that our communities continue to have the essential goods and services they need, when they need them.”