Dealers Should Pay Attention to Pay Plans

I’ve often written about high salesperson turnover and on certain pay-plan options dealers might consider in addressing that issue. 

Because salesperson pay is a hot topic these days, I would like to remind you of a few items that directly relate to and affect resulting payout percentages.

Often, when we discuss and compare new- and used-car departmental profitability at meetings, dealers and managers say, “My sales compensation is out of line.” Invariably, that prompts other participants to discuss the components of their dealership pay plans.

We have thought-out pay plans that emphasize gross, volume, customer-satisfaction indexes and the like. But in many cases when we see the actual percentages we are paying, they don’t resemble our intended numbers.

For example, when a plan is written to pay 25% of the gross after a small pack, how can actual compensation percentage be 30%?

Let’s break down the sales-compensation number as it appears on your financial statement and consider the items it may include. 

Obviously, the largest items are sales commissions and accompanying incentives for volume and gross. Then there is potentially the cost of salespersons who have failed to earn an amount equivalent to federal minimum-wage standards. If you pay a salary, that number would also be included. These numbers are fairly apparent, but other, less visible items, are more difficult to determine and manage. For instance, many of us pay “cash-in-fist” incentives. Individually, these may be small, but what do they represent collectively? Do we pay a percentage or a flat commission on finance and insurance and accessories? If so, is that charged to F&I or sales? What about CSI incentives?

Two other items which may have a major impact are minimum commissions and incentives. 

First, let’s talk about the incentive part. Experience has shown that when used- vehicle commission percentages are high, you can almost always identify the issue by looking at the dealership’s used-vehicle inventory aging report.

Most dealerships have a strict aging policy, such as 45 or 60 days and out. When an aging vehicle’s time starts to run short, a flat or large minimum commission is put on it. What happens to the overall commission percentage if I pay a $300 minimum or flat commission on a zero-or-less gross deal? 

This situation is aggravated when there isn’t always sufficient higher volume and gross to offset this practice. Today, many dealerships also pay incentives on aging new-vehicle inventory. That affects the overall number as well.

Now let’s consider minimum commissions. Almost everyone has those, but do we track the number of minimums we are paying (and the dollars they represent) as a percentage of our total monthly deals and their commissions?

When analyzing a monthly financial statement/operating report, if I note a commission percentage that exceeds an acceptable standard, I know there is an issue which requires my attention. But without being able to identify the components of the number, can I really manage it?

I’m not an accountant, but I have learned that certain accounting tools help make me a more effective manager.

If you record and track individual components of total expenses in any account, you almost always see that number improve. Monitor the dollars you are spending monthly vs. the average expenditure during the past 12 months.

Remember the Thomas S. Monson quote: “Where performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates.”

Sit down with your controller and identify each account’s individual items you feel may be out of line, not just sales commissions. Present this information to your team during monthly performance analysis meetings. Discuss methods of reducing these expenses. These simple actions can create very positive results. 

Good selling!

Tony Noland of Tony Noland & Associates is a veteran dealership consultant. He can be reached at tonynolandandassociates.com.