Pay Plans for the Sales and Administrative Staff - DealersEdge

5,0004,600$ in Millions4,2003,8003,4003,0002001 2002 2003 2004 2005 2006 2007YearsTotal Gross ProfitTotal ExpensesWhile some of the added expenses undoubtedly reflect higher rent factors due to facility upgrades, theanswer, obviously, is in the traditional dealership’s cost structure, specifically in the way most car dealerspay their productive employees, the sales consultants and sales managers.I have a strong bias against full-commission pay plans for dealership managers. And I hope I’ve beenconsistent in expressing that bias over the years. The full-commission plans, more than any other factor,in my opinion, actually work against dealership profitability.Full-commission plans for managers are a very bad idea. I use the term full-commission to mean the kindof compensation that pays a sales or service manager only when gross or net profit is generated. Themanager receives no salary or wage other that the commission. Draws don’t count if they have to be paidback when a manager gets “into the hole.”There are a number of reasons for this bias:First, full-commission pay plans allow for wide swings in total pay for the manager and in payrollexpense for the dealer/owner. When business stinks the manager starves and when business isgreat, the dealer ends up overpaying for the results. Remember, the manager hasn’t taken therisk of ownership. Why should he or she bear the same risks and rewards as thedealer/owner/investor?Second, full-commission plans make no provision for the non-production responsibilities that adealership manager carries. Managers have supervisory, administrative, and training dutiesamong others. Full-commission pay plans encourage the manager to neglect the important butnon-revenue-producing aspects of the job.Third, full-commission pay plans deprive the dealer/owner of the opportunity to benefit fromeconomies of scale in sales and service. The chart above demonstrates this. If a manager isalways paid 15 percent of the gross, then the dealer’s selling efficiency will always be stuck at15%. It cannot improve. Shouldn’t investments in technology like lead management systemsand CRM solutions improve sales efficiency and shouldn’t the dealer/investor reap thoserewards?Fourth, full-commission pay plans reduce the effect of management. When managers get paidonly by commission, they are likely to worry most about the activities that generate thosecommissions. A dealer can direct the managers to focus on certain products, customersatisfaction, anything, but the managers will do what earns them the easiest and fastestcommissions. It’s called “working the pay plan” and it always results in frequent pay planchanges and increase employee dissatisfaction. Remember: anytime you change a pay plan,it will be perceived, rightly or wrongly, by the employees as a pay cut.