In a perfect world, all expenses in your businesses would be variable. The economy takes a turn for the worse? No problem, your rent just went down 10%. However, what about the flip side of that proposition – The economy and or your customer activity results in improved revenue and income, are you willing to share in the upside?
For many years, I’ve been preaching the benefits of adjusting your compensation practices to be geared toward variable compensation, or what I prefer to call Performance Pay. If done correctly (and fairly), a Performance Pay model has the ability to transform corporate culture, improve profitability and make a positive financial impact on those non-driving associates who want to achieve more – and be compensated for going the extra mile.
In this week’s post, we will discuss general guidelines to follow when creating a framework for performance-based pay programs. Before we start, let’s be very clear, performance pay can (and should) be used for all non-driving associates, not just sales, marketing or Fleet Managers. The whole concept leads to a ‘averaging up’ phenomenon within organizations – the people that can’t produce or are not efficient will be the first ones to ‘opt out’ of the process by moving on, leaving existing and new high performers to execute on your mission, and take their spots – All Boats Rise!
Step 1 – Clearly Define What Success Looks Like for the Company
The best place to start is to determine what realistic success looks like for your organization, taking into account your current operating realities (mode, customers, economy). Regardless of the operating mode, we believe that a Gross Margin (Revenue minus Variable Expenses) of 25% is achievable for most Trucking companies (with focused effort). If you decide that this target is achievable, it provides a great framework to segment the different components of the Gross Margin calculation, and then assign responsibility for improving, to specific people (groups) AND tie a significant portion of their personal income(s) to the goal. For example, productivity is a crucial component of the revenue part of the gross margin equation. If drivers are sitting for an unreasonable amount of time at customer’s facilities, when they could their time could be spent driving, you can (and should) empower people to ensure that you are more than recapturing the expense of the lost driving time with consistent accessorial charges. Further, that person or group of people should have their income tied directly to the success of their efforts.
Step 2 – Clearly Define (and Communicate) the Difference between Performance and Bonus Pay
The best way to differentiate between Performance and Bonus pay is Habits versus Results. Performance Pay is meant to reward the proper daily and weekly habits and practices, which will eventually create long term success. Each have their place in an organization, and should be celebrated. Performance Pay is tied to productivity, and can fluctuate up or down based results. As an example, in Accounts Receivable, you can measure the lag between delivery and invoicing on a weekly basis – this is an example which you can use for Performance Pay. Conversely, achieving superior Accident and Insurance results over a period of twelve months would be an example of ‘Bonusable’ situation.
Step 3 – Stress Test the Program
This one goes both ways. Although many high performing associates have the traits of successful entrepreneurs, you can’t expect them to assume as much risk as the shareholders under a Performance Pay compensation framework. You need to show what can happen to their income when things are firing on all cylinders, but also when things fall of the tracks. Even though you want to have each associate put more ‘skin in the game’, you also want to ensure the stress of a downturn won’t drive away a valuable team member. Further, you want to make sure you stay on the right side of Federal, State and Provincial wage requirements. A realistic goal would be to get to the point where 50% of the non-driving wages are tied directly to performance.
Step 4 – Keep it Simple
Clearly identify the measures you are going to use to communicate success (or poor performance) for an associate or team. If the measures or formula becomes too complex, you will not appeal to all potential high performers. Further, do not tie compensation for an associate to something they have no control over. As an example, your Fleet Managers can help ensure compliance with your Fuel network, but you can’t expect them to control how quickly you’re getting paid by your customers.
Over the next couple weeks, we will be expanding on each of the above steps. In the meantime, I want to reinforce that a properly implemented Performace Pay program has the ability to transform your business AND the industry!