It All Begins With Pay Plans

Dealers have always tried to balance their employee compensation plans with the long-term benefit of their dealership, while also incentivizing short-term results.

That balance has been difficult in the sales department and finance and insurance office. Paying managers a percent of gross profit without regard to terms furthers increasingly longer finance terms.

When needing to reduce payment to reach customer requirements, lengthening the term seems to be the first option of most dealership desk managers.

Finance managers are anxious to increase term to create additional gross profit by adding in rate profit. Additional revenue comes from longer terms in a finance contract.

Yet, dealers understand the ramifications of more customers being out on lengthier finance contracts.

Lenders are stricter these days when it comes to financing negative equity. Dealers need those owners to do business more often in order to boost overall volume and to produce trade-ins in a market where there is an acute pre-owned vehicle shortage.

Leasing and balloon financing are excellent tools to shorten term and enable consumers and dealers to do business with each other more often.

But if manager compensation doesn't incentivize shortened terms, managers tend to take the path of least resistance.

Former dealer Mark Ragsdale, author of “Car Wreck: How You Got Rear-Ended, Run Over, & Crushed by the U. S. Auto Industry,” says this:

Since battling with buyers to elect more consumer-friendly financing options can cost both the dealership and the employee money, employees don't bother with the hassle of it all.

While there are long-term dealership benefits to shorter-term financing such as leasing and balloon notes, employees don't often see themselves as even being employed by that same dealership in order to reap future sales.

Employees can and often do find themselves accepting their next dealership job before they have even left the last one. Consequently, dealers are reluctant to train employees to confront financing battles such as increased down payments and logical leasing or balloon contract discussions. After all, if there is an additional buck to be made at a dealership down the street by going with the customer long-term financing flow, why should an employee stick around for painful classroom training?

Longer-term finance contracts place consumers in a position of slower loan principal repayment, leaving them upside down in car loans longer.

Sometimes the sheer economics of stuffing all present negative equity into a new loan necessitates longer-term financing, in order to meet a lower payment demanded by the customer or lender. In all cases, the dealership employee charged with convincing customers to take a shorter term at a higher payment (or cajoling customers into making a larger loan down payment) has little or no incentive to do so.

Namely, the consumer resents higher payments and higher down payments, and the dealership actually makes less money by talking a buyer into accepting either of these alternatives to long-term financing.

F&I consultant Becky Chernek, says, “The course of least resistance leads to managers marking up rate and extending the term to achieve a larger commission check for any given month, absent a compensation plan that takes finance contract term into account.”

She recommends a “matrix pay plan” that balances income and term.

Brian Benstock, vice president and general manager of the high-volume Paragon Honda and Acura in New York City, incentivizes his staff to look to shorten finance contract term.

It is reflected in the dealerships advertising, which features shorter-term payments on inventory.

Paragon focuses on that and renewal procedures to track owners. That means more business with the same consumer.

Benstock says, “This will never happen if a dealer's compensation plans works against what is good for the dealership and the consumer overall.”

He and majority owner Edith Singer note Paragon hit record profits, despite the bad economy.

Long-term finance contracts aren't good for dealers or consumers. But it all begins with pay plans.

Auto consultant and former dealership general manager David Ruggles is at [email protected].