Pay Them Up & Down

I often receive questions from readers and clients concerning my thoughts on management pay plans.

While I never specifically suggest what a manager should be paid, I share my thoughts on the components that should be part of all management compensation agreements.

It is practically impossible for a dealer or operator to keep watch on all aspects of his or her business, so we must ensure we have managers helping us. Personal experience tells us that we can't assume critical elements of our business will be handled just because they are included in a job description.

The item I find missing most often from management compensation agreements is accounts receivable. Almost everyone includes gross as a pay-plan component. So, if I was paid to create or generate the gross, why shouldn't I also participate if proceeds from a sale aren't collected?

There are numerous examples I could cite, but the most visible areas are fixed operations involving wholesale parts accounts and extended service contracts. In the new- and used-vehicle departments are contracts in transit and vehicle receivables including hold checks, pick-up payments and factory incentives.

As a manager, my pay plan was influenced, either positively or negatively, by the accounts receivable balance 61 days and older.

As an example, at this month end let's assume I'm a parts manager and I have a balance of $1,500 in my accounts 61 days or over. As a line item, that amount is subtracted from my payable gross.

At the end of the next month I have improved the position of the 61-day-and-older accounts and the total balance is now $1,000. In this case, I have a $500 pickup which is added to my individual payable gross.

In other words, I am either rewarded or penalized monthly on my ability to stay on top of the accounts receivable.

Let's think about areas or accounts we need help watching. How about the departmental policy accounts, outside services or the ever-problematic supply accounts? Would you not focus on them if those expenses affected your pay?

One compensation theory we suggest to our clients is paying managers on their departmental gross A.C.E. (After Controllable Expenses). This is specifically departmental gross less certain expenses that a manager can control. Not only does this focus a manager on gross, he or she now includes expense management in the equation.

Personnel productivity is another item to include in compensation programs for variable managers.

Example: I'm a vehicle manager with five sales people assigned to me, and the average salesperson sells 8.5 units monthly. If my team exceeds the dealership average by 10%, I receive a management bonus. If my team exceeds the average by 20%, my bonus increases to another level.

But what happens if my team falls short of the dealership average? Then I'm penalized by a specific dollar amount.

Dealer principals must ask themselves where they want to focus and where they need help.

Common pay-plan components many dealers cite are: customer satisfaction indexes, market share, sales effectiveness, inventory aging, days' supply targets and departmental employee turnover.

If we want to teach our people and help them develop sound work habits, it's critical to focus on the areas that will not only help performance, but enhance personal development and add to their income.

Pay really does influence behavior.

Good selling!

Tony Noland ([email protected]) is the president and CEO of NCM Associates, Inc.