I get asked about once each week for advice on building a sales compensation plan. This is an area, for some reason, dealers are always tinkering with. As you might guess, I am absolutely not a proponent of frequent sales compensation plan changes – even a change to the benefit of the sales team can be viewed negatively and can impair employee morale and therefore performance.
Why these changes seem to take place is whoever created the existing plan failed to take into account some variables that ultimately create a surprise for the dealer when they receive their monthly financial statement. They build a plan, put it in place, and expect their targets to be hit. At end of the month, they look at their statement and it shows $450 per retail vehicle and/or 18 percent of their vehicle gross in sales compensation.
Most dealers have targets in mind when they create a sales compensation plan.
Those targets will generally revolve around a target dollar amount per retail vehicle sold (which must be competitive in their market area and often fluctuates around $350), and, a percentage of retail vehicle gross profit (target of 13 percent – 14 percent).
How do we miss these targets?
Issues occur when dealers look at their average vehicle gross profits, forecast their average monthly sales, count the number of sales personnel they intend to maintain and divide the average monthly sales by the number of sales people. (Ex. – 100 sales, 10 sales people, average of 10 units per sales person.) I give the dealer enough credit for being able to figure out their hard and soft packs along with the required percentage of commissionable gross profit to get where they need to. What happens is they fail to take other circumstances into effect. This includes:
- Minimum commission deals (often $200 – $300 on skinny or loser gross profit deals).
- Minimum wage and employee turnover.
- “Spiffs” and annual bonuses.
Minimum commission deals can have a profound impact. It is difficult to keep quality sales team members at franchise stores if they have to rely on gross profits on new vehicles. With manufacturers giving dealers so much money “beneath the line,” I dare say in many stores the majority of the new vehicle sales are “minis.” While these minis don’t impact the comp per retail unit adversely, they sure hammer the expense on a percentage of gross profit basis.
When it comes to a sales compensation plan, the states have varying laws as to how often a sales person must be paid, but suffice it to say, the Federal law is that they must all earn minimum wage. In New York a sales person can have an up and down month, sell 10 units in the first two weeks the rest of the month they didn’t earn any commission so they must be paid minimum wage. That would mean that if they worked 45 hours they would receive $427.50 ($9/hr) and for two weeks that would equate to another $85.50 per retail unit.
Considering the above, factor in turnover. The bottom 20 percent of a sales force is often churning. Those cycling out probably aren’t selling much, and frequently hit the minimum wage issue on no or poor sales. Someone cycling in probably has the same issue for the first few weeks. All this adds to the end-of-month surprise.
Spiffs and Bonuses
Finally, spiffs or annual bonuses can really add up. Some dealers pay double unit bonuses for aged unit sales. Others pay a bonus for three vehicles sold in one day. Some have graduated comp percentages that escalate well above the target based on achieving plateaus. All these have a profound impact on what the end of the month numbers will show.
When building your sales compensation plan, you should take all of these circumstances into effect before you launch a flawed plan. Additionally, you should ramp it up and make sure if you were to increase or decrease your unit sales by 10 percent, 20 percent or even 50 percent that it would make sense.
“A sales compensation plan in the auto industry is supposed to help an employee motivate themselves to achieve management’s goals, however, it can also be the source of poor morale and high turnover.”
If you have to make a change, be sure to think it through thoroughly before you roll it out. You will be happy for time well spent.