Jan. 19, 2004 – How do you set your pay scales?

Each year at this time we spend literally hours and hours painstakingly pouring over our budget plans for the New Year. First, we try to predict sales levels based on historical output, current trends and our best guess as to what the future may hold. We also consider the impact of any strategic decisions we have made, such as adding or eliminating locations or lines, modifying our management structure or what we hope will be innovative changes in the way we’ll approach the business in the coming year.
Once we’ve got those revenue numbers fully in mind, we review all our expenses, line by line, in an effort to keep each one in line with the expected revenue. Estimating line items like facility expense, insurance costs and shop supplies are fairly straightforward and are inserted in the new budget without much controversy or discussion. Slightly more problematic are line items like customer relations expense, advertising expense and travel and entertainment expense. But, we manage to slog our way through all that with relatively little difficulty.
Then we come to personnel expense. For each of the last three years, total personnel expense has accounted for almost half of the gross profit the company has produced, so it’s obviously a major factor in the level of net profit the company will achieve. It’s also the most personal expense we have — meaning everyone takes compensation personally, especially their own. So, it can be a touchy subject discussing how many people we need to produce the expected level of sales, what contribution we expect from each of those people and exactly how we should compensate each one in order to facilitate the achievement of those expected contributions.
As I talk to powersports dealers across the country, many have avoided the compensation conundrum by 1) not producing detailed annual budgets and 2) using the same pay plans/levels that they have had in place for many years.
That approach hasn’t worked for us because 1) we can’t imagine running a business without detailed annual budgets and 2) even after five years we have been unable to design totally satisfactory pay plans/levels that are consistently fair to the employee and the business while at the same time maintaining a proper motivating force for each employee in each area of the dealership. So, we continue to search for just the right combination of fairness and responsibility and a balance between incentive and base pay.
Unfortunately, the industry has not settled on any one-size-fits-all formulas that work in all sizes of dealerships, in all local markets or with all types of products. Dealers around the country use everything from total commission to set annual salaries to pay department managers.
Incentive compensation parameters run the gamut from pure profit sharing to departmental sales. Larger dealers feel compelled to follow every rule set by wage and labor regulators, many smaller dealers do not.
The compensation conundrum boils down to two basic issues:
1. how much can a dealership afford to pay (and will that provide a living wage for employees), and
2. what is the best method to pay out that compensation (what methods best motivate the employee to pay close attention to the details and give a top effort throughout the year).
Ideal or standard personnel expense levels for each department of the dealership are readily available from industry consulting outfits like Lemco and Associates, Gart Sutton’s Best Operator Clubs, Spader Consulting and Bill Shenk’s PowerHouse Twenty Groups.
Lemco, for example, recommends paying P&A personnel no more than 30% of the department’s gross profit. Members of Sutton’s groups usually report a slightly higher number. Similar recommendations exist for sales, F&I and service. Membership in a twenty group or training from an industry expert is an indication that these type of benchmarks are recognized by some in the industry and, presumably, used as serious targets.
However, in talking to many dealers across the country, I find relatively few who are committed to adhering to hard and fast rules in the area of personnel expense, especially if the dealership has been profitable. More often, the individual being compensated and historical practices hold sway.
Most dealers I’ve talked with have personnel expenses that are lower than the benchmarks in some areas and higher in others, although many end up with a total that still allows their store to make an acceptable profit.
We have tried to use these benchmarks as our targets for personnel expense. Thus, we at least have a starting point for answering the question of how much (although employees will always disagree with this number, especially as it pertains to them). The question of just how to best pay out the compensation remains, however, very much up in the air.
The main controversy in how to best construct compensation plans lies in the combination of base pay and incentive pay. Or, whether it should be one or the other. Base pay may be an hourly wage or, for most managers, a base salary. Incentive pay covers commissions, bonuses and spiffs. Employees, wishing to minimize their risk, often prefer a large percentage (if not 100%) of base pay. Employers, on the other hand, often prefer a large percentage of incentive pay in the mix in order to motivate and reward an employee to strive for higher levels of performance and to cushion the negative influence on profits if sales levels should fall below expectations.
Perhaps most importantly, the pay plan in place will tell the employee exactly what you want him to do and what you care less about —whether that is the way you want it or not! It’s about putting your money where your mouth is. Do you want the employee to sell something? Concentrate on volume or gross margin? Maintain an inventory? Be nice to customers? Clean bikes on the floor?
Each component of any pay plan tells your employees what you value. Base pay can be used to tell an employee he/she is valuable, that you want them to spend time at work and you want them to perform a variety of administrative duties. Incentive pay can reward sales, gross profit, customer satisfaction and net profit performance.
Whether you’ve carefully thought it out or not, your pay plans tell your employees exactly what you think is important. So it is very important to be sure the compensation motivation message you are sending is the one we want your troops to receive.
Many pay plans have multiple components. The split between base and incentive pay varies greatly by dealership, but two trends emerge. The majority of dealers I spoke with, prefer some sort of combination of these two types of pay and, generally, increase the mix of incentive pay for higher-level employees such as department and store managers. That is similar to what we’ve been constructing in our company.
Here, in my unscientific survey, is what I found dealers all around America doing about the compensation conundrum:
Total compensation is determined by the size of the store and the cost of living in the area. Total annual compensation for sales managers ranged from $45,000 to $75,000, among the dealers I talked with. Compensation plans usually featured a mix of base and incentive pay. Base pay was generally less than 50% of total compensation and incentive pay was usually based on major unit sales gross profit and, to a lesser extent, F&I income.
As important as the pay plan for sales people is the dealership’s philosophy regarding appropriate staffing levels in the sales department. Compensation totals are determined in large part by whether the dealership expects each salesperson to deliver 100 units or 300 units per year. Those quotas encompass competing industry philosophies about sales staffing levels. The first assumes high turnover of lots of inexperienced employees eager to work for a short while in the industry. The second assumes a smaller staff and higher levels of professionalism and tenure among more experienced employees who are committed to staying in the industry for at least a few years. Total compensation levels range from well under $20,000 to more than $40,000 annually.
Since many state and federal wage regulations require employers to pay commissioned sales people an hourly wage or a commission, whichever is greater, most dealers I talked with have adopted combination pay plans that consistently reward the marginal production of each sales person and eliminate the need to compare hours vs. commission.
Beginning with an hourly or monthly base, they add a commission on each major unit sale. In addition, the salesperson can earn spiffs from the dealership and/or the OEMs.
Generally, F&I managers have the highest incentive pay mix among the dealership’s department managers. Total annual compensation, again depending on store size and location, ran between $45,000 and $70,000 at the dealerships responding to my queries. But, the incentive component of the pay plans comprised 65%-80% of total compensation, based on a commission for net F&I income and sometimes, to a much lesser extent, a piece of the major unit gross profit.
In my survey, P&A managers were generally compensated with a fairly high level of base pay, usually in the form of a salary, but frequently an hourly rate, with 20%-30% of their total compensation based on sales or gross profit levels. Total annual compensation ran from about $35,000 to $50,000, depending largely on store size and location and sometimes on the range of duties assumed by the manager. For example, several dealers reported that their P&A manager had, for all intents and purposes, also become the store’s IT manager.
Counter people were almost universally paid an hourly wage, with about half of the dealers I talked to adding a relatively small amount of incentive based on individual or total P&A sales. Many dealers said they tried to design a pay plan that would pay a full-time counter person between $22,000 and $32,000 annually, depending mostly on experience and competence at this position.
In my survey, service managers’ compensation plans were fairly evenly split between straight salaried plans and base pay/incentive pay plans, with the incentive component usually based on service labor sales. Even then, the base pay was more than 50% of the total compensation. Total annual compensation ran between $40,000 and $55,000, with experience and competence being as or more important than store size and location.
Most dealers I spoke with pay their technicians with a variety of combinations that included hourly pay and flat rate time. While several continued to pay on a flat rate commission schedule, quite a few mentioned that they had lately amended their plans to include a “shop time” hourly rate. Others said they had abandoned flat rate and changed completely over to hourly pay plans. Total annual compensation for “A” Techs ranged from $35,000 to $50,000. “C” Techs’ compensation was reported as usually in the low to mid $20s.
Now that I’ve talked with dozens of dealers across the country, carefully studied the recommendations and guidelines of all the consultants and taken into account the experiences of our own company, I believe I can answer with a fair degree of certainty the first question in the compensation conundrum. I do know how much we can afford to spend on personnel in each department at a specified level of sales.
What remains a bit less clear is the best way to pay out the compensation we’ve decided we can afford. For 2004, we’ve decided to pay our managers with a combination of base salary and incentive pay, usually based on departmental gross profit. We’re still contemplating some plans that would put more emphasis on, and provide more incentive for hitting, each store’s net profit goals.
We have decided to pay our sales people a small hourly wage, plus a commission on the sale of each major unit, plus a commission on the sale of accessories, plus a variety of in-store spiffs. In 2004, we’ll staff each store less aggressively and improve the annual compensation, tenure and professionalism of our sales staff.
Parts counter people will be paid an hourly rate and a small commission on each department’s monthly production. Service techs in our shop will remain on a flat rate plan for 2004.
In talking to dealers around the country, it quickly becomes clear that there are as many pay plans and compensation methods out there as there are dealerships. And, there certainly must be many ways to skin the compensation cat. But it is important to conduct an annual review, not only of what each department in your store can afford to pay out, but of the methods you use to do so. Facilitating your own net profit along with the quality of life and work performance of your employees are vital objectives that deserve some extra evaluation and annual fine-tuning.

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