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Dealer Insights - March/April 2014 - The Art of Devising Pay Plans: What to Consider when Structuring Compensation

Feb 25, 2014

Dealership employees typically rate compensation as among the most important aspects of job satisfaction. Strong pay plans motivate staff, and employees are more likely to stay on board when they feel well rewarded.

Totaling the sum of all parts 

What will succeed at your store depends on a variety of factors, including:

  • What motivates your staff,
  • The nature of the position in question,
  • Your product line and strategic objectives,
  • Customer Satisfaction Index (CSI) scores for your dealership,
  • Manufacturer prerogatives, and
  • Your turnover rate.

Other operating traits also should be considered. No universal formula works for every dealer — you have to find the right mix.

Creating the right formulas 

When evaluating your pay plans, consider establishing pay amounts by position. Determine what you think a specific job should pay, and construct your plan to allow the employee to meet or exceed that number if he or she meets or exceeds expectations.

Keep your pay plans simple. They can become convoluted over time, as more bonuses and spiffs (extra incentives — often an immediate bonus) are added to the mix. To streamline yours, pretend you’re a prospective employee. After your initial interview, could you explain to your spouse how and when you’d be paid? Unpredictable, confusing or unrealistic plans are unlikely to attract the best workers.

Working with sales 

Also, when it comes to sales staff, don’t ignore the importance of a base salary. Weak new vehicle sales and lackluster margins may cause top salespeople to defect to other dealerships or industries. So, the custom of paying a straight commission may no longer be realistic. Instead, in addition to paying commissions, many dealers now provide a small base salary, which is often based on margins and bonuses, and linked to volume or customer satisfaction scores.

In fact, you can come up with a menu of plan options for sales staff, including base salary, commissions, bonuses and spiffs for, say, the salesperson who generates the highest margin sale or the technician with the highest proficiency rating each month.

Remembering the big picture 

Link your pay plans to your business strategy. They should reward the actions you desire and what the factory is seeking, such as higher margins, volume and CSI scores.

In addition, tie compensation to desired actions. If you want more extended warranty revenue this month, for example, offer a $300 bonus to the salesperson who closes the most deals that include extended warranties — not just to the F&I manager.

Rewarding service staff fairly 

In developing your plans, look beyond new and used vehicle sales. Service is your bread and butter, so start thinking of service personnel as “salespeople” for parts and labor revenues. Perhaps modify their pay structure to include a commission on both labor and parts per vehicle serviced.

You also might include proficiency and efficiency spiffs, such as a $150 gift card for the technician with the highest customer service rating or lowest number of monthly “do overs.”

Treating plans like contracts 

Effective pay plans are detailed in formal contracts. If these are disputed, judges and arbitrators tend to presume an employee didn’t agree to an unwritten rule or unsigned document. Thus, contracts should define the basis for calculating commissions and bonuses, specify timelines, and allow for deficit carryforwards and error corrections.

The value on noncash perks 

Never underestimate the value of noncash perks — such as extra time off, tickets to sporting events and birthday luncheons. Noncash perks and simple owner recognition create a friendly, family-like atmosphere that keeps employees around for the long run. Plus, noncash perks are often less expensive.

Being competitive matters 

Dealership employees — particularly salespeople but other individuals as well — are often aware of how well their peers at other area dealerships are paid. To put it another way: Word gets around. Structure your pay programs to keep up with or even exceed those of your competition. Seek help from your CPA if needed.

Dealer Insights - March/April 2014

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