Pay Plan Uses Some Carrots, But Lots of Stick

The Philpott pay plan is one of the more controversial compensation setups found at some car dealership service departments.

Philpott, named for the person who came up with it, uses a carrot and stick, with emphasis on the stick. 

This plan sets salaries, but deducts from them if staffers do not meet specific sets of objectives.

For example, a service advisor’s compensation is budgeted for $35,000 a year. This pay plan has a base salary of $1,166 per month and a bonus of $1,750 per month if specific objectives are attained. 

Objectives can include sales targets, customer-satisfaction levels and production goals.

The objective elements of the pay plan might be as follows.

• Customer-satisfaction levels from average to above-average.

• Monthly parts sales of $25,000 or higher.

• 620 or more flat-rate hours billed for the month.

The service advisor receives a $290 deduction from the bonus for any objective not attained. In the case of an advisor meeting only the first two objectives, the bonus paid is $1,460 ($1,750 – $290 = $1,460).

If the objectives are reasonable, then it is logical for the service advisor to attain them on a consistent basis.

Since the total expense for the advisor is calculated in advance, the pay plan should be at or below budget. The Philpott plan only deducts from the budgeted amount.

Let’s look at the plan’s strengths.

Both the high and low points of income can be projected by the service advisor.   High performers receive their full compensation and low performers receive lower pay. There is a direct cause-and-effect relationship between performance and pay. 

Calculation of the pay plan is simplified since the salary and bonus is agreed upon in advance.

But weaknesses in the plan seem to outweigh the strengths.

Weaknesses center on establishment of the performance objectives.  Lack of understanding can result if the goals are not properly explained and realistic objectives are not established. Management must provide a clear understanding and constant tracking toward any objective established throughout the month.

The plan does not provide incentives for above-average performance. The only incentive is to meet the objective, not to exceed it. High performers might not want to work for long in an environment lacking rewards for outstanding performance.

This pay plan is a highly operational technique on the part of the service manager. It requires constant monitoring and evaluation of service-advisor performance throughout the month. 

Most managers do not have the necessary time to devote to this technique.  This can cause high levels of frustration on the part of the employee and result in high employee turnover.

Data not received on a timely basis can make it difficult to calculate the bonus at the end of the month. Waiting too far into the start of the next month does not provide a proper cause-and-effect relationship. This plan can be hard to administer.

Once designed and budgeted, it is very difficult to go over budget.  However, payments can be made to individuals who might not have earned them if attainment of the objectives is subjective.

Sandra O’Neal, author of Compensation Challenges and Changes, finds that 58% of U.S. companies are reviewing their current pay structures, questioning their focus and intent. More than 90% say the goal of any new pay plan is to link wages more closely to the company’s business strategy.

She says many pay plans “fail to reward the new behavior employers are seeking.”

Many employers are revising pay plans to motivate workers to adopt new work habits.

The revised plans allow employees to see direct cause and effect between their performance and the success of the company. 

The Employment Policy Foundation reports these changes have increased production by as much as 13%. The reward system creates focus, which is what you want any pay plan to accomplish.

David Linton is a partner with OnCourse, a fixed operations training firm.  He can be reached at [email protected] and 205-492-6431