Compensation: Which way is best?

It is often wisest to create blended plans, which gradually, over time, allow for people to adjust psychologically and socially and re-establish their connections to their deep inner motivators.

Throughout automotive retailing, as well as most other hard-charging sales enterprises, there's a lot of hand-wringing when it comes to fashioning compensation plans.

It's common for sales pay plans to be changed two or three times a year and introduced without warning at a morning sales meeting. It has been so throughout my 27-year career in the business. This is not good news, for it says that far too many of us in leadership positions lack a clear understanding and a cohesive set of principles that can bring constancy to how we address this very important issue.

We can never get to simple compensation plans that will stand the test of time if we lack a well-thought out theory about human motivation. Fact is, nearly every dealer and manager in the country has his or her own rough draft of such a theory in the form of opinions about what really makes people tick.

To go from that rough draft to fully connecting all the dots, we have to do something many of us have a hard time with — we have to slow down and ask some fundamental questions. Car dealers and managers are among the smartest folks I know. They have plenty of intellectual capacity. They also have a tendency to move too fast, which is why a lot of the fixes they come up with need fixing again before long. For durable solutions, we have to move at depth, not at speed.

Here are some of the deeper questions we need to ponder to get to compensation plans that can last.

These are profound inquiries. They take time. However, it's worth the effort to pursue them because they are likely to lead to a clear and coherent theory that, once in hand, can guide the wise development of plans for a variety of positions.

Mid-level managers and independent-minded representatives of the front line should share in the brainstorming. Outside resources should be mobilized (consultants and teachers) including those necessary to absorb the core ideas of some of the key works on the psychology of motivation.

As daunting and complex as this undertaking may sound initially, especially given that many mid-level managers and front-line people are sometimes preoccupied with their jobs, the outcome is often quite simple — a theoretical statement or collection of statements in every-day language that sums up the findings.

My own experience with this process with executives from a wide array of dealerships and other businesses has led me to these conclusions:

Straight commission based on gross profit per sale plus unit volume bonuses can be fingered as major contributors to automotive retailing's distorted and self-serving behavior responsible for years of poor public image.

Nonetheless, it has long been considered an immutable truth among owners and managers in this business that the only way to motivate people is through these external devices. Salespeople are often characterized by their own managers (former salespeople themselves, ironically!) as basically lazy and interested in only one thing — the commission.

So, in one breath we praise commission pay and in the next, we damn the personality traits it attracts and the behaviors it fosters, as if we have no responsibility for creating the system and hiring to it!

Yet, over the last decade, numerous stores — both negotiating and one-price — have converted to blended plans that include substantial salary components and incentives, both team and individual.

In my own experience, sales results were either the same as under incentive plans or better over a sustained period at every store where these plans:

a) were fully supported by leadership,

b) involved representatives of the sales force in their development,

c) included the necessary time for learning and brainstorming to get a well vetted end product and

d) avoided other simultaneous changes in the business system that might constitute too much for people to assimilate at one time.

Employee happiness and loyalty increased as measured by ESI surveys. Customer happiness and loyalty increased as measured by CSI surveys. Why? Because the theory proved true.

The underlying premise changed from mistrust (“You'll only perform if I use a carrot and stick.”) to one embodying a basic trust in internal human motivation (“I hired you because you're the kind of person who will take pride in doing a good job.”) Most people will respond positively to being more genuinely valued and trusted.

By the same token, these blended compensation plans acknowledge the reality that sales people have been conditioned over years of experience to respond to various forms of incentive pay.

It was deemed unrealistic and unfair to expect them to give up that psychology with the snap of a finger. In fact, the belief was often expressed that, as Alfie Kohn has argued in his book “Punished by Rewards,” some form of commission may always be appropriate for salespeople, particularly those in “high ticket” areas.

The critical challenge in every case was to find the right balance between the investment and incentive components. In most cases, the model was similar to that found in pro sports. Some criteria were developed to fairly arrive at differential salaries. The range was certainly not as wide as between Shaquille O'Neil and the lowest paid Laker, but there was a spread to acknowledge and honor the different levels of contribution.

A path was also offered for migration from the low to the high. The salary component represented between 50%-80% of total pay. The remainder was generated through team bonuses based on a combination of gross profit and volume. In other words, the message is, “We'll pay you up front for your individual talent (investment) and back-load the reward for collective effort (incentive).”

Did some die-hard pay-for-performance adherents leave when these changes were made? Yes, of course, but in most cases, this was deemed a gain, not a loss for the culture and for productivity.

In a business deeply rooted in an incentive or performance pay mentality, well-conceived shifts towards investment sustained or improve key performances, most significantly those with long-term impacts for growth such as employee loyalty and customer loyalty. Tweaking of plans back towards more individualized incentives yielded mixed results.

To raise performance further would call us to a broader theoretical challenge — systems thinking. A system is the sum total of all the interdependent forces that yield a specific result.

Compensation represents only one of those forces, but far too often, business leaders become fixated on it, change it too often and expect too much of it. They fail to see that no matter how much or how little or how cleverly we pay people, in the end, there are other forces in the system that strongly influence the quantity and quality of their performance.

That includes hiring, numbers of staff, training, work schedule, culture, processes, management skill and style, overall strategy, inventory management, technology, advertising and marketing.

We must work continuously to identify and remove the obstacles in these areas so people's efforts pay off with maximum efficiency.

If we have the courage and commitment to invest in finding our theoretical roots and then pay people equitably, fairly, erring slightly on the side of generosity, we can expect that they'll vigorously contribute to continuously improving the system in which they work.

We need only invite them to do so, trusting their intrinsic desire to contribute and to experience pride, joy, delight and a sense of belonging.

Robert Kamm Compensation: Which way is best? It is often wisest to create blended plans, which gradually, over time, allow for people to adjust psychologically and socially and re-establish their connections to their deep inner motivators. Incentive, investment or both? Robert H. Kamm, a dealership veteran, is author of “The Superman Syndrome: Why the Information Age Threatens Your Future and What You Can Do About It” (1stBooks Library). He is President of Kamm Consulting in San Luis Obispo, California. (805) 544-9726, email: [email protected]. web site: www.kammtown.com.