Want to stir up a heated debate? Just bring up the topic of compensation or pay plans among a group of dealers or dealership employees. Get dealers together at their 20 Group meeting and the topic is sure to surface. Comp plans are often controversial, or at least debatable, because the same comp plan used for two different dealers may result in gain for one and pain for the other. Recently during an AutoDealerDaily.com chat forum on Special Finance, the discussion took off on a tangent about comp plans and it took nearly fifteen minutes to get the participants refocused. While some folks profess comp plans to be a science, to me it is more of an art. Successful compensation plans usually have five common components. First, they must budget. Since personnel related expenses are usually the largest group of expenses on a dealer’s financial statement, it is imperative that they budget. A comp plan that is designed even one percent too heavy can turn into $20,000 per year net income reduction with the blink of an eye. That may not seem significant, or, might be a number that can be rationalized, but with the average dealership netting roughly two percent on sales, every percent counts. If comp plans wind up being as much as five percent too heavy, the result is a heavy impact on net income over the course of a year.
To budget, the department’s (or dealership if it is a stand alone special finance operation) should budget at no more than 35 percent of the total retail gross (netting F&I income after chargebacks and F&I personnel), including all benefits and taxes. The benchmark for management compensation (excluding including F&I managers) is ten percent of total retail gross. The benchmark for total sales compensation is 12 percent of total retail gross (or 14 percent of front-end gross). Clerical and other personnel such as lot attendants should combine for no more than seven percent. That leaves roughly six percent for payroll taxes and workman’s comp. What about F&I managers? They should come in at no more than 15 percent of their net gross profit, after chargebacks.
With the budget in mind, the next component that the comp plan must contain is focus. With that I mean the plan must focus on the goal for the individual or team. For example, if incremental gross profit is the goal, then you focus the pay plan on reaching certain levels of gross, rather than rewarding for selling a particular number of units. If attaining or remaining at a certain level of CSI is an essential element of a person’s job description, then certainly a portion of the comp plan must be driven by CSI. Additionally, the comp plan should be weighted toward the various elements of the employee’s job description. For example, if you considered CSI to be 50 percent of the person’s job description, then 50 percent of the comp should be focused on CSI.
The next component a comp plan must contain is motivation. It must allow the employee to motivate themselves. If you put an incentive in the comp plan, it must be based around attainable goals. Put the carrot too far away, and one totally loses sight of it - or worse yet, it becomes a disincentive to try to overachieve. Additionally, whether or not the comp plan has an incentive (hard to believe an auto dealer wouldn’t have an incentive in a comp plan though), the rewards should reflect the interests of the employee(s). Money usually is the top priority, but some employees will trade some of the money for more time off. Others seek recognition. Still others like perks like travel or merchandise. It boils down, especially in management, to understanding the individual and what is important to them.
The fourth component is fairness. It has to be a win-win comp plan. The employee certainly has to feel like they are being rewarded for working hard to reach your goals. If you don’t compensate them fairly, certainly someone else will. If you overpay them then you certainly will either not attain the goals that you set out to accomplish, or you will artificially limit what your dealership can achieve.
How is the latter possible? I know a dealer that is in a medium sized market with a solid economy. It is a successful dealership in a market that is ripe with special finance opportunities. He hired a person to handle their special finance efforts. The job description had that person doing everything from inventory to sales to funding. He set the comp plan to pay them 25 percent of the special finance department’s gross profit.
According to the benchmarks above that is a bargain. The problem is that while they are averaging about 25 units a month, with $50,000 to $60,000 in gross profit - that is about the limit of what one person can handle - or desires to handle. You can do the math and see that there is little motivation for the special finance manager to grow much more. The problem is that in the market they are in, this dealer is leaving a minimum of 50 additional sales per month on the table.
We have now identified that comp plans must budget, must focus, need to motivate, and must be fair. What is the last component? Consistency. There are those that argue that consistently tweaking pay plans drives superior performance. I believe that consistently tweaking pay plans drives good people away. No more than any other dealer, I do not like surprises when it involves my assets or line item expenses on my financial statement. Neither do the employees who work with you like surprises to their income stream. Good relationships are built on trust, and when their comp plans are continually modified, the trust tends to wane. That is not to say that comp plans should never be changed - certainly as businesses ebb and flow the need will sometimes occur. Those times should be the exception however, not the standard.
As I said in the beginning, compensation plans can be challenging - one man’s gain is another man’s pain. It will often take time to master the art of developing successful comp plans. However, it is worth the effort as if comp plans are structured properly at the onset, then they can be a source of great inspiration and profits for all parties. Good selling!
