We updated this post in July 2019 to reflect the ever-evolving financial landscape for FedEx Ground contractors. Continue to read our weekly Insights to get the latest news and industry details.
Reading Conflicting Info on Bonuses? Learn Why
If you are researching buying a FedEx Ground route, you may have heard about bonuses for contractors. But the information is probably confusing, conflicting, and/or out-of-date.
Here’s why you’re hearing more than one thing: FedEx Ground historically awarded bonuses to contractors. However, FedEx Ground is in the process of phasing out bonuses and so some contractors have them and some do not.
Understanding what bonuses used to do, why FedEx Ground is phasing them out, and what comes next is a critical piece of the puzzle as you model future finances.
Historical Bonus Structure for FedEx Ground Contractors
The Independent Contractor (IC) model (which will phase out completely by May 2020) had a monthly and quarterly bonus structure. Monthly bonuses distributed 12 times per year and reduced by a percentage with every service complaint or missed delivery.
ICs received quarterly bonuses four times per year per ground Primary Service Area (PSA).
When FedEx Ground established an Independent Service Provider (ISP) model for all FedEx Ground P&D routes the ISP model incorporated two types of bonuses: Customer Service Incentives (CSI) and Period Safety Incentives (PSI).
FedEx Ground used CSIs to incentivize service among contractors. All contractors received CSIs on a regular schedule (based on a negotiated rate in their contract). The CSI bonus decreased in a given period if there were CSI complaints against that contractor. For example, late deliveries or customer complaints.
PSIs recognized contractors that operated routes without safety violations or incidents in a specific period of time. Similar to CSIs, contractors negotiated a rate for regular PSI payments. These payouts decrease for every safety violation within the payout period. Safety violations included accidents with the FedEx Ground truck, a delivery person injured on the job, or damage to a customer’s property.
What’s Wrong with Bonuses?
Historically, CSI and PSI bonuses accounted for approximately 10-15% of a P&D operation’s Total Revenue. And we know that the profit margin on a healthy P&D business is often between 15% and 20%.
Contractors quickly learned that these bonuses did not operate like bonuses at all. They were vital portions of an operation’s revenue. Operations that did not earn their bonuses did not have strong profits and sometimes lost money! This bonus money was actually essential revenue.
When contractors experienced service difficulties, they lost bonuses. When contractors lost bonuses they were unable to provide high levels of service and they stumbled through more service difficulties. This lost revenue started a vicious downward cycle.
What Happens to Revenue when Bonuses Phase out?
FedEx Ground noted the vicious cycle (where decreased bonuses led to further service difficulties) and opted to do away with the bonus structure.
Moving forward FedEx will pay out this former bonus money at 100% as part of the regular weekly service pay for P&D contractors. Any contractor negotiating a new ISP agreement will be negotiating an agreement that will not have the bonuses in them.
This phase out will be complete by the end of Quarter 2 of 2020.
Doing away with bonuses is a WIN for all contractors! It improves everyone’s margins and is particularly significant for any operations that struggled with bonuses in the past.
While P&D bonuses will phase out completely in the coming year, linehaul contractors still have a bonus structure to incentivize safety and service.
Linehaul contractors receive a monthly bonus 12 times per year. They receive a $0.037 per mile bonus unless there is a safety or service incident. If there are a safety or service incidents, the bonus amount per mile decreases per incident.
When we talked about big risks and big rewards in linehaul operations, these bonuses per mile are a large part of that puzzle.
WHAT'S NEXT IF YOU WANT TO LEARN MORE?
If you need more help with the details and navigating contract negotiations, contact us for consulting.
We can walk you through pieces of the puzzle for buying a FedExGround route, such as:
Understanding Contract Terms
Terminal Relationship Management
If you are interested in buying a FedEx Ground route, check out our listing page for operations currently on the market.