As the most visible compensation expert within the retail automotive industry, I frequently receive dealer inquiries that sound something like this:
“I think it’s time to revise some of my compensation plans, but I’m not quite sure how to start. Would you send me some samples of plans that are currently working well at other dealerships that have engaged your services?”
Unfortunately, I learned the hard way that, unless I was working in a teaching or consulting environment, my short-lived practice of providing sample pay plans became a recipe for disaster. Each dealership is unique, and what works well for one may not work at all for another. I assure you that I did not establish this inflexible policy due to selfish interests, but rather because it is in the best interests of the dealer community.
On our web site at garryhouse.com, under the “How We Do It” section, you will find the GH&A detailed compensation planning and implementation process. We provide this so that our clients understand what they can expect in exchange for the professional fees that we charge. However, we certainly recognize and understand that this type of engagement is not for everyone. Some dealers and their management teams have the inspiration, talent, and discipline for the “Do It Yourself (D-I-Y)” approach. For that reason, and for those dealers, I have developed the following 6-Step Guide.
Before I begin, please understand that, to be effective, a compensation plan must:
- Primarily focus on those areas for which the manager or employee is accountable,
- Provide motivation for the manager or employee to continually achieve higher levels of individual or departmental productivity and profitability, and
- Be fair to both the manager/employee and the dealership, under varying levels of operating performance
The 6-Step Guide
- Assess your current compensation methods. Review your compensation plans and your employees’ earnings histories. How do the various compensation categories relate to the dealership gross profit and expense structure? Budget guidelines are available at garryhouse.com.
- Determine and Forecast Key Results Areas. Identify and quantify each element for which the manager or employee is totally accountable, and also those for which he/she is only partially accountable. Develop a planning model depicting various performance scenarios. To determine individual and overall compensation philosophies and budgets, consider what the position should pay: as a percent of gross; per Retail Unit; in annual dollars. Consider, too, what this specific person expects, needs, or deserves: based on past performance; based on past and current earning levels; based on the competitive local labor market.
- Develop and Test Your Plan(s). Design a compensation plan that attempts to match your objectives at the Planned Performance Level (PPL). Then test the plan at numerous variances from the PPL. Once you have developed the initial plan, you may want to test it and even “negotiate” the plan with the involved employee.
- Use an Automated Plan Calculation and Presentation Tool. A Plan Calculation and Presentation software application will: (1) automatically calculate and present current and prior performance and earnings (by line item) for a 12-month period; (2) project annualized earnings, assuming current month performance represents the monthly average; and/or (3) project annualized earnings pace based on actual year-to-date earnings. There’s a sample in the “Free Stuff” section at garryhouse.com.
- Document and Implement the New Plan. Create a compensation plan document that explains the plan and the accountability philosophy in detail. Communicate and validate departmental objectives and individual compensation plans. It is strongly recommended that plan documentation be signed by the employee and the manager, then filed for future reference.
- Follow-up and Fine-Tune the New Plan. Even the best-designed compensation plans may need adjusting once they are exposed to the dynamics of the real world retail automotive business. If the basic parameters are sound, they will remain sound, but it is possible that the detail of the plan may need to altered to accommodate unforeseen and uncontrollable circumstances.
Now, go forth, and address the compensation challenges facing your dealership today! If you find that you could use some professional help, give me a call. I don’t charge for the first phone call!