Do you ever wonder whether there's a better pay plan out there? It's a common concern in the automotive dealership industry. The truth is, there's no one-size-fits-all solution that will magically transform your entire dealership overnight. However, after years of closely collaborating with dealerships, we've pinpointed the fundamental principles that underpin effective pay plans.
At our company, we've revolutionized the commission process as part of that mission, we want to help share best-in-class ideas and concepts. We live and breathe commission plans every single day. The insights shared in this article come from our extensive experience working with dealerships nationwide. We aim to provide a framework to help your dealership determine the right commission plan.
Before we delve into the specifics, it's crucial to emphasize that your choice of pay plans should align with your personal management style, vision, and dealership goals.
Let's dive into the core philosophies. Many of these principles are directly informed by industry surveys that shed light on employee frustrations and retention issues.
Core Pay Plan Philosophies That Work For Dealerships
Understanding Your Financial Statement
First and foremost, the cornerstone philosophy that drives successful compensation plans for your dealership is understanding your financial statement, how the financial statement ties to your dealership goals, and what each lever is that drives financial performance. Your financial statement essentially serves as the compass for your business. Utilize industry benchmarks when setting these goals.
At the simplest level, a dealership's goals are typically tied to revenue, profitability, and customer satisfaction. As a result, all your pay plans should tied in some way to these line items in the P&L.
The further you move up within management, the more closely these pay plans should be directly tied to the actual P&L performance. For example, your sales associates will likely have a commission percentage tied to front or back gross. There is a clear tie to revenue and profitability here, but when you get to your sales director, he should get bonuses based on the actual.
NADA offers some great courses on understanding your financial statement.
Simplicity, Consistency, and Transparency
One of the worst things you can do for your employees is constantly changing their pay plans. We work with dealerships revamping entire pay plans every few months. Imagine if, every few months, someone completely changed the rules of baseball. No one would want to watch that, and the players would hate playing.
This is how your employee feels when you constantly make updates. Do you see how this approach has the opposite effect than intended? Change pay plans often and you’ll see lower performance than their peer dealerships.
At the end of the day, each role at your dealership has a few fundamental things they should get paid on, you can get creative around the edges and update goals. When your staff can't grasp how to maximize their earnings, it's a recipe for subpar results.
We understand some things come up throughout the year that you need to help motivate your staff to accomplish, but we recommend a different approach, where you use SPIFFs for short-term goals rather than commissions. (Stay tuned for an article on this.)
Successful pay plans maintain a consistent structure while allowing for adjustments in goals and minor tweaks. Additionally, providing employees with clear data on their potential earnings is paramount. It's not about inundating them with information the dealership deems important; it's about focusing on what matters most to them—their income.
Individual Performance Matters
When it comes to non-managerial positions, pay plans that depend on the entire team achieving objectives often fail, except in extremely rare cases. In such setups, top performers end up receiving the same compensation as low performers, which is demotivating for your top performers and encourages laziness among your low performers. We strongly encourage you to live by the words James Smith famously proclaimed at Jamestown:
“He that will not work shall not eat.”
For your department managers, you should build your pay plans around team goals, specifically those that relate to your financial and customer satisfaction goals. Your managers should be the ones primarily responsible for coordinating teamwork.
We aren’t saying you need to eliminate team-based incentives from pay plans, but they should never make up more than 10% of any non-managerial pay plan.
Only Include What They Can Impact
This might seem obvious, but we regularly see pay plans where a dealership has decided to improve a specific metric, so they include a related incentive for everyone at the dealership. We understand the sentiment. You want everyone to care about this really important metric, but the reality is you shouldn’t get paid for something you can’t impact.
The most common stumbling block we see is including dealership customer satisfaction on every pay plan in the dealership. Again, we get it and actually believe customer satisfaction should be on every pay plan (nearly). Still, if you are a service advisor getting paid on total dealership customer satisfaction, you are too far removed from making an impact because there are more than likely at least 40+ other people impacting that score.
Instead, we recommend making their customer satisfaction bonus 100% based on their individual service advisor customer satisfaction score. You know what happens when you do this? They take personal ownership of every single interaction with a customer. They want every interaction to be phenomenal. They also want to ensure the techs do their job for their customer. It is all about empowering your staff to own their metrics!
Reward Productivity, Not Availability
Many dealerships fall into the trap of paying for availability rather than productivity. This usually stems from employees' desire for consistent pay. However, it's crucial to evaluate who is making these requests. If it's primarily low performers, it's a red flag. Proper staffing levels should be assessed to ensure high performers aren't idle. Management must address any underlying issues affecting productivity.
Customer Satisfaction is Critical
Pay plans should incorporate incentives tied to customer satisfaction metrics. Repeat and referral business is the lifeblood of successful dealerships, and fostering customer satisfaction is key to retaining business.
We recommend making customer satisfaction scores a significant component of total pay, around 15%.
Provide Advancement Opportunities
According to a recent study by COX Automotive, one of the top three reasons staff leave a dealership is opportunity for advancement.
While many dealerships view themselves as relatively flat organizations, there are ways to create advancement pathways within departments. By introducing additional job titles and compensation tiers, employees get a sense of progression within the organization, boosting morale and retention.
Here is a real example we often share with our dealerships. Historically, the sales department has consisted of two to three levels of advancement: sales associate to sales manager to sales director. We recommend expanding upon this structure by introducing additional job titles and promotions within the sales associates group by creating levels.
- Level 1 Sales Associate: This is the entry-level sales position where a new hire without sales experience starts. For the first two to three months, this employee makes an hourly rate and receives unit bonuses based on sales production. This serves as an introductory phase to the sales team, provides a stable income while your salesperson gets up to speed, and allows for training.
- Level 2 Sales Associate: Compensation in this role is commission-based, offering higher earnings potential for individuals who perform above average.
- Level 3 Sales Associate: At this stage, additional benefits are integrated into the compensation plan. Advancement to a level 3 sales associate is contingent upon meeting specific production requirements or demonstrating longevity within the organization. Level 3 associates should be the guys your Level 1 Sales Associates look up to and want to be “when they grow up.”
This tiered structure provides a clear path for career advancement within the sales department while also serving as a motivational tool for new hires. By delineating these tiers, employees are better equipped to understand how they can progress within the organization.
This setup also addresses significant gaps that have traditionally made recruitment and retention difficult in dealership sales positions and better helps define training needs at each level.
One thing to keep in mind is that with each new advancement, the average employee should have the opportunity to earn more money.
Implementing such a structure has proven to enhance employee satisfaction and retention, particularly among high-performing individuals. By offering a defined career path and rewarding achievements, we create a conducive environment for growth and development within our sales team. This is just one example of creating advancement opportunities that can be used across departments.
Longevity Bonuses for Hard-to-Fill Positions
This is a strategy we recommend for addressing hard-to-fill positions, particularly in cases where losing experienced employees can lead to significant disruptions. Typically, this involves offering a bonus or hourly increase tied to the number of years worked at the dealership. The underlying assumption is that your longest-serving employees are among the most valuable. Additionally, it serves as a recognition of loyalty to your team members.
So, how does this work in practice? Let's examine its application in the service department. Longevity bonuses are commonly implemented in one of two ways: based on productivity or as a flat bonus.
In both situations, you’d set up tiers based on how long a tech has been working for you. You’d always pay out this bonus at the end of Q1 the following year. The employee must still be working for you at the time of the payout. These bonus amounts should be market-dependent and take into account how much it costs your team to replace these levels of expertise at your dealership.
Great Training and Processes
Even the most meticulously crafted commission plan falls short of optimal results without effective training and processes. Investing in training programs across all departments is crucial. Employees need the right tools, knowledge, and skills to implement your dealership's programs successfully.
Let’s Dive Deeper
Crafting effective pay plans for automotive dealerships requires a strategic blend of insight, adaptability, and commitment to aligning incentives with performance. As we've explored various core philosophies, it's evident that understanding your dealership's financial landscape, maintaining simplicity, consistency, and transparency in pay structures, and emphasizing individual performance are fundamental to success.
Remember, the journey toward optimizing pay plans and maximizing team performance is ongoing. With the right guidance and proactive measures, your dealership can thrive in an ever-evolving landscape.
It's about empowering your team, fostering growth, and driving results. Explore avenues to elevate your team's performance, whether through refining existing structures or implementing innovative approaches. Start unlocking your team's full potential today!
