In the car business our turnover is out of control.
There are many reasons but the one I want to address here is compensation of sales professionals. I am going to discuss the problem and offer some thought-starters as to possible solutions.
One of the most disheartening things I experienced during my career as a car salesman, and later, as a manager, was when the dealership changed my compensation plan. In the 12 years I was in retail, it happened three times.
The first time, they called a mandatory attendance meeting. There was an air of confusion and anticipation because all we were told is that the general manager was going to make an important announcement. Even as I write these words, I can still see the general manager nervously tap-dancing in front of the assembled sales force trying to explain that somehow less money was actually a pay raise.
All of the managers were up there with him at the front of the room, sort of backing him up because they had been filled in before the meeting. You could see by their facial expressions that they weren’t happy about it but disagreeing would have been a career decision they didn’t want to make.
One thing I’ve learned after 49 years in the car business as a top salesman and a record-setting manager: any time a dealer changes compensation plans, it creates suspicion and mistrust. You are going to lose people, and you’ll be surprised which ones choose to leave.
Fallout of Change
Even if the change is good, which I’ve seldom seen, at least half of your top talent will leave the company within a few weeks thereafter. Most of them will not quit immediately, although there have been instances where I’ve seen nearly half walk out before the meeting was over. If they’re going to leave, they quietly go along with while lining up another job.
As a manager and now a dealer consultant, my philosophy has always been to hire the best people and pay them too much. Your pay plan should be structured in such a way that your top performers can make a higher income with a better schedule than they could find anywhere else in the market.
The last job I had in the car business—F&I Director in 1986—I made more than $17,000 a month for three consecutive months. I had just left another company because of a pay plan change and this dealer promised that the compensation plan was chiseled in granite. I don’t think he had his hand on the Bible, but I was convinced I’d found a home for life, or so I thought.
The Challenge of Compensation
You see the problem was something that top performers face in any organization. As a super-performer, I encountered it several times. The problem is that there are no secrets in the car business. It’s not long before everyone knows how much you’re making and, regardless of their talent or position, they all want a raise.
In my case, I was outperforming my pay plan. It began when the F&I vendor that supplied the finance products and training sort of whispered to the dealer that they were paying me too much, and my two employees as a result were also making too much.
So here comes the general manager, the dealer, and the F&I Consultant. We’re going to the conference room to have an important meeting. No surprise, I was already prepared.
The general manager started out with a speech that focused on the fact that I was making more than he was. My reply was, “Okay, let’s switch jobs, I’ll take your job and your pay plan, and I’ll still make more than you do.” Of course, when I said that I’d already made a career decision.
Looking in the Rearview Mirror
Once I decided to leave, I went out to the parts department and got two cardboard boxes, ‘Salesman’s Samsonite,’ and packed up my stuff. Then I turned in my demo and asked for a ride home.
Looking back, I really couldn’t blame the dealer because he was in a situation he’d created by structuring the wrong compensation plan. When one employees dramatically over-performs the pay plan, it will create dissension with the other employees. That was a smaller country dealership that wasn’t used to writing paychecks that large. Truthfully, my background was a larger multi-dealership company where I had actually been making a lot more than that. Regardless, that was an incredible amount of money in 1986.
Since then, I’ve consulted hundreds of other dealerships in all types of markets. The advice I’m about to give is the same ones I have given to dealers who have written six-digit checks for me to share and implement in their dealerships.
The first rule of changing pay plans is to make the next time you change their compensation the last time. What I mean by this is to be sure you can live with the change no mater what happens. The dealer must assure all variable departments that you’ll never change it again.
The second rule of changing pay plans is to give all of the salespersons the choice to go on the new pay plan or stay on the old one. You should structure the new compensation plan to give the top performers the opportunity to make more than they’re making now.
When you give them the choice to stay on the existing pay plan, you take out all of the confrontation out of it. In 90 days, we’ll review what you made on the old pay plan to what you conceivably could have made on the new one.
At that time, we’ll give you the choice to go on the new one again. Then, we’ll honor the old pay plan for you as long as you’re with the company. If at any time you decide to go on the new pay plan, that’s fine BUT, if you do, there’s no option to go back to the old one.
All new hires will be on the new compensation plans.
How To Structure Compensation Plans For Sales, Managers
In the book, The Seven Habits of Highly Effective People, by Stephen Covey, the second habit is “Begin with the end in mind.” That is the way you structure pay plans, “What are you trying to accomplish?”
You have to realize that a pay plan is a job description. Are you more interested in high volume or higher profitability per unit?
For many years I’ve told dealers that you don’t have to give up high volume sales to have high gross profit per unit or great customer satisfaction. You can have all three without giving up one to have the other.
But you must have a pay plan structured so that your average salesperson can make a comfortable, above average living, while your top producers have an opportunity to exceed what they’re making now.
Building a Package
Obviously, a higher volume pay plan focuses on unit sales with a flat amount on each one up to a plateau number, say ten units pays $250 each. Then after the first ten units that goes up to say $350 per unit. Some pay plans retro that back to unit one. Then after fifteen units it goes to maybe $500 each, at twenty-five units it jumps to $800.
You could build a small percentage or a bonus on F&I products. There should always be some small compensation for salespersons for F&I production. I consider this ‘blackmail’ not to sabotage the F&I sales.
There’s a myriad of different per unit plans; many dealers have gone to this type of pay plan because the manufacturers shaved the margins so thin that you have trouble holding gross in today’s market, and then, the inventory shortage hit and grosses were obscene, thousands over MSRP and salespersons being paid on gross were making incredible money.
Of course, whatever goes up, must come down, and now with inventory normalizing we’re having to work the deals harder.
So, if your dealership is paying salespersons on gross, then 25/5 up to 45/5 is standard across the industry. That is 25% on the front and 5% on the back, up to 45% on the front and 5% on the back. Once again, some dealers have different variations with 25% for the first ten units and 35% up to fifteen units, and 45% on everything over twenty units.
In the 90s I developed a compensation plan with four levels, all having a different percentage tied into unit sales:
- Entry Level
- Professional Level
- Executive Level
- Master Level
For instance, an Entry Level salesperson must achieve Professional Level within 90 days or they washed out. They received a base salary or commissions whichever was greater.
The Professional Level was set at what they’re making now:
- 25% with a $250 Mini-deal.
- No split deals.
- 5% F&I commission
They could stay at this level for their entire career as long as they met the minimum two out of every three months. Say we set Professional Level at eight units a month at dealership’s gross average. Then they must do that two out of every three months or they dropped back to Entry Level.
Executive Level might be set at 15 units, at for example 30%, once again at dealership’s average gross per unit. To maintain Executive Level, they must reach two out of three months unless life’s event keeps them from it. We tried to put as many non-monetary perks as possible in the position:
- One weekend a month off
- $350 Mini-deal
- $100 ‘Sales Assist’ to help close deals for Entry Level persons
- Bonus for six consecutive months at Executive Level
- One-week paid vacation at their average income
- Dinner once a month with dealer and their spouse or significant at upscale restaurant
- Showroom floor desk, not in bullpen
For the Master Level, it might be set at 35% with 25 units two out of three months. Still at dealership’s gross average. If they fail to qualify, they drop back to Executive Level.
- Car allowance $250 monthly
- $500 Mini-deal
- $100 Sales Assist to help close deals for Entry Level persons
- Come and go as they please, no schedule (as long as they maintain Master Level; trust me, they’ll be there)
- Full time paid assistant after staying at Executive Level six months for as long as they maintain that level
- Two-weeks paid vacation with 1st class airfare or cruise for them and significant other(s) anywhere in U.S., Mexico, or Caribbean Islands
- Private office
- Engraved gold Rolex for maintaining Executive level for two years
- Executive/Master dinner at upscale restaurant with Dealer/GM and spouses or significant other once a month
That’s just an example naturally. Through the years I’ve had dozens of dealerships implement some version of that pay plan. Of course, dealerships changed hands and new general managers came in and changed everything just to change everything.
Looking at that as just an example, I don’t know anybody that implemented it exactly as I designed it but rather used the concept as the template.
The Family Issue
I recently saw a commercial on television here in my hometown where a dealer was showing his dealership and bragging that they had seven family members working there. The commercial showed all seven laughing and having a cookout with their families, wives and little children (future heirs).
It occurred to me that there is absolutely no advancement opportunity in that store. With seven family members all drawing paychecks out of one dealership, they couldn’t be paying their people that much. In fact, I know that dealership and nobody is making what I consider good money except the family.
That is why I designed the multi-level pay plan. It gives sales professionals the ability to feel there is meaningful advancement opportunity. I designed it much like when I was in the Boy Scouts growing up. I am an Eagle Scout, but I had to go through all of the other ranks to achieve that.
Those are my thoughts on Sales Compensation. If the dealer doesn’t go crazy with unreasonable ‘Packs’, and put added spiffs and bonuses into the program, that dealer has a chance to achieve less turnover and better, happier employees with a career path.
Maybe, in the future I’ll write something about Management Compensation.