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.

Summary

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!

I heard a phrase the other day, and it set my mind to digging deeper into the thought. The individual I was with was talking about his wife’s shopping addiction. He said that she was a ‘want person’ and not a ‘need person’. Sometime back I actually did some research on the internet on this subject of compulsive shoppers and found that there is actually evidence that suggests that a small amount of endorphins and dopamine is released into the brain when something is obtained or purchased; a feeling of accomplishment that is felt by most of us. Unfortunately, some of us enjoy the feeling so much and it is so short lived that they get hooked on it and become compelled to have the feeling over and over again. It can be very destructive.

Hearing that phrase immediately sent me to a flash back situation. I was at a truck dealership some time ago and while there, I began talking to a driver who was out shopping for a truck. This fellow, just new to the industry as a licensed AZ driver, was determined to become an Owner Operator ASAP. As we chatted, I noticed he was eye balling a year old conventional that was tricked out the wazoo. Beside the beautiful beast was a more conservative aerodynamic truck that was obviously going to be a far cheaper  to operate and had much less ‘bling’.

Having been through the ‘bling’ time of my life when it comes to large cars, I felt compelled to impart my years of wisdom and inform the newbie in no uncertain terms what the best decision would be for him at this point in his career. I went so far as to suggest that the net profit of the more aerodynamic vehicle, with less chrome, would pocket the same net dollars in four years that it would take him to earn in five years in the bling mobile, if he was lucky.

As I have said in the past, I am no sales person. I do not have that skill and I admire those that do. I mention it because this person endured all of the things I could throw at him that were designed to shed light on this decision. I went at him with things like 20% better MPG, ease of maintenance with less bling and less unnecessary repairable gadgets, less capital expenditure, better cash flow and a lighter vehicle that will allow more payload. He looked at me and said: ‘Ya but I have a young son and I’d like to enter into some of the show and shine events with him this summer’. What could I say? I wished him well, that I hoped he would have great success as an Owner Operator and I went on my way. This person knew what they wanted; the fact that it was way more than they needed meant nothing to them.

So what type of person are you: a need or a want person? Let’s look at the famed Psychologist Abraham Maslow’s hierarchy of needs; he designed a five tiered pyramid. You start with food and shelter, then move up to things related to safety and security and then onto belonging, esteem and finally self-actualization.

It is an interesting flow of thoughts here as I overlay this line of thinking onto the current situation of driver turnover. It seems to me that many companies with high turnover struggle to simply supply what a driver of today needs in tier one.

Let’s break it down a little. According to Maslow, the base of his hierarchy pyramid is the need for food and shelter. To me, that means a steady income. With that steady income a driver buys food and shelter for his family. It’s not too complicated, if you don’t give me work or miles, I don’t stay here because you can’t satisfy my basic needs. The next level is safety. Can you provide a safe vehicle for me to drive and a safe work environment for me to work in with lanes, customers, fuel spots terminal etc.? If I don’t feel safe and secure, I’m out of here! Why stay? I have options that won’t put me in harms way, that pays the same as this or better.

If your company does not have the first two driver needs nailed down and nailed down hard, then you are likely a company that has very high turnover. I would guess that it is likely over two hundred percent! You over promise and under deliver, you don’t pay at minimum market rate and your safety record is in question. Also, your trucks are likely being pulled over regularly by DOT because of it.

It is the next few steps that I believe eludes the majority of trucking companies. The next step is Social Needs or Belonging. Does your company make folks feel like they belong to a community? How do you create that sense of community? Do you communicate through newsletters, social media etc. and what do you communicate? Do you try and involve the driver’s family? Do you have functions and opportunities for them to participate in? If you do, I’m going to guess that you feel your turnover is manageable. You feel like this because your turnover rate is at or around the published industry average.

If you’re a company that has mastered the first three steps and are also valuing your people and recognizing them on a regular basis, I’m betting that you’re on the low side of the turnover equation. If you’re past this point and actually assisting your folks to be everything they can be in their careers, lives and relationships, then you’re likely best in class. Your employees and your entire management team have built a company whose strategic advantage in the marketplace is it’s people. Congratulations to you and I’m sure that your dealing with best in class numbers; about 20% and lower would be my guess.

The basic need in driver retention is income and safety; these are the hard things. Transitioning from here to fulfilling the totality of needs, belonging, esteem, and finally self-actualization is where the game is won by best in class companies.

It’s not OK! Now that we’ve cleared that up, watch this video:

I had an epiphany about 10 years ago when I, along with the other members of the senior executive of the company I was working with, took a training course titled “Management by Responsibility”. This eight-week course opened my eyes to both human behaviour and my own behaviour to the point that it literally changed the way I look at the world. I know that the other managers enjoyed the course but I don’t think any of them were affected to the extent that I was by the material. (more…)