Pay Plans That Make Sense

In last month's article I wrote about salesperson turnover and commented on certain pay plan options dealers are considering to help address that part of the issue.

Since salesperson pay is a topic receiving much attention, I would like to remind you of a few items that directly affect your resulting payout percentages.

Often, during meetings when discussing and comparing new- and used-car department profitability, I've heard the comment: “My sales comp is out of line.” Invariably, other members then are questioned about the components of their dealership pay plans.

Isn't it strange how we have well-thought out pay plans which most often emphasize gross, volume, customer satisfaction and the like, but in many cases, when we see the actual percentages we are paying, they don't resemble our intended numbers?

How, when my pay plan is written to pay 25% of the gross after a small pack, can my actual compensation percentage be at 30%? First, let's dissect the sales-compensation number as it appears on your financial statement and consider the items it may include.

Obviously, the first and largest item is sales commissions and the accompanying volume/gross incentives, and 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 others are more difficult to determine and manage.

For example, 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 accessories? What about customer-satisfaction index incentives?

There are two other items which may have a major impact: 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 aging inventory report. Most dealerships have a strict aging policy, i.e. 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 my overall commission percentage if I pay a $300 minimum or flat commission on a zero-or-less gross deal?

This situation is aggravated and exaggerated in cases where there isn't always sufficient higher volume and grosses to offset this practice. Today, many dealerships also pay incentives on aged new-vehicle inventory, which will impact the overall number as well.

The last item is minimum commissions. Today, most everyone pays a minimum commission, but monthly, do we track the number of minimums we are paying (and the dollars they represent) as a percentage of our total commissions?

Monthly, when analyzing my financial statement/operating report, if I note a commission percentage that exceeds a standard, I may 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; I'm speaking of sub-accounts. If you track and publish the individual components of the total expense dollar in any account, you will almost always see the number improve.

Track the dollars you are spending monthly versus the average expenditure during the past 12 months. Thomas Monson said: “Where performance is measured, performance improves. Where performance is measured and reported, the rate of improvement accelerates.”

Meet with your controller and identify individual items included in an account, not just sales commissions. Present this information to your team during monthly performance analysis meetings. Discuss expense-reduction methods. This will create a positive result.

Good selling!

Vetteran dealership consultant Tony Noland is at tonynoland@tonynolandand associates.com.

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