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Pay Plans: When Reality Must Confront Perception

May 25, 2011
Pay Plans:  When Reality Must Confront Perception

Pay Plans: When Reality Must Confront Perception

6 min to read


"If you pick the right people and give them the opportunity to spread their wings and put compensation as a carrier behind it, you almost don't have to manage them." Jack Welch


The serious development agent is constantly analyzing the dealer's business and tweaking various elements to promote consistent growth. There are many areas in a dealership we can impact through our development efforts with the dealer's cooperation, but one of the most delicate subjects to tackle with the dealer or operator is the compensation of key management employees.

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Let's parse Jack Welch's quote above and use "When Reality Must Confront Perception" as our yardstick. The first phrase of the quote, "If you pick the right people..." must be the foundation of a successful development effort. We may not get to pick 'em, but we better have the dealer's buy in that after we work with his people, eventually they either have to fish or cut bait. This is easier said than done and oversimplified here, but if the dealer sees over time that your agency is serious and the numbers are going up, eventually you will earn the right to ask for a manager to be replaced if they don't measure up.


You will need to document the performance of a manger over time to make your case to the dealer, so be prepared with more than just verbal opinion. A lost profit analysis, comparing an underperforming manager with others on the team or even another store with similar demographics will help to make an emotional decision more of an empirical one. The dealer may perceive his manager is performing well, but it is the agent's job to confront him with the reality of his manager's lack of performance. Hopefully, at the end of the day, the dealer understands his business is not a clubhouse for his buddies and can make a business decision to terminate an employee, or find another spot in the store for them.


"...and give them the opportunity to spread their wings..." is the second phrase in the quote and probably the most important. There is no opportunity without consistent and ongoing training that never stops. Growth is tough to create, it's tough to manage, and it's impossible to achieve over time without constantly providing a fertile environment where managers are challenged to take their craft to the next level. Where reality must confront perception with opportunity is in the reward. If a manager embraces the training and fuels the growth of the company, his compensation must be commensurate with that growth.


Ideas are great, but my guess is that most general agents are a practical sort and want to know how one can "...put compensation as a carrier behind it..." Here is where the notion of creating the type of finance manager you want can be accomplished with a carefully thought-out pay plan. The first step is to get the dealer to agree on a maximum percentage that an extraordinary performer should be paid. For our industry, anything less than 15% to 20% is a non-starter. In this author's opinion, 20% for extraordinary performance is the benchmark. I also believe that pay plans should be based on what an individual finance manager can control, so chargebacks should be accounted for individually, not on a departmental basis.


Next, have the dealer describe what an outstanding job would be in several important categories. Imagine a reasonable dealer that is willing to pay around 20% if his finance managers can accomplish the following, and let's call these our "Goal Metrics":

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  • $1,000 Per Vehicle Retail (PVR) average

  • 50% Vehicle Service Contract (VSC) penetration per retail

  • 60% Guaranteed Asset Protection (GAP) penetration per finance

  • A Product Index (number of F&I products sold per retail) of 2.0

  • 93% minimum Customer Satisfaction Index (CSI) in finance based on manufacturer surveys

The above reasonable dealer is paying 15% to his finance managers now and his current metrics are nowhere near those specified above as extraordinary performance. What we want to do is plug the dealer's Goal Metrics into a spreadsheet matrix as seen in Figure 1, where PVR is on the x-axis and Performance Index is on the y-axis (Performance index is the sum of the percentages for VSC and GAP penetration for illustration purposes and to keep it simple):


Figure 1

↑PVR

$1000

15

16

17

18

19

20

$900

14

15

16

17

18

19

$800

13

14

15

16

17

18

$700

12

13

14

15

16

17

$600

11

12

13

14

15

16

$500

10

11

12

13

14

15


60%

70%

80%

90%

100%

110%

Performance Index →


Using the matrix, at $1,000 PVR and a Performance index of 110%, the finance manager would earn 20% of his net F&I dollars produced after his own previous month's chargebacks are deducted. A 1% bonus would be paid in addition to the 20% if the Product Index of 2.0 is achieved and a 1% bonus would be paid if CSI is 93% or better.


In this example, if the dealer is paying 15% now on $100,000 net F&I dollars for what amounts to "15" on the matrix, one can extrapolate that F&I total dollars will increase to $143,000 at "20" on the matrix. In exchange for the increase, the dealer nets after compensation an additional $38,000 or an increase in net profit of 31%. If the managers hit both of the 1% bonuses and the result pays out a total of 22%, the dealer still records a net profit increase of just under 30%.


Basically we're asking the dealer to reward his finance managers up to an additional 7% in compensation if he earns up to an additional 30%, or for every extra thousand dollars in gross produced, he pays out up to an additional seventy dollars. Can anyone argue that this is not a fair exchange?

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If we analyze the psychology of the example pay plan above:

  • We create a well rounded finance manager- the finance manager must focus on both PVR and core product production with the Performance Index. He is forced to balance gross and penetrations without sacrificing either. A weak PVR manager, in order to prosper, will be forced to focus on gross, and conversely, a weak Performance Index manager will be forced to focus on core product sales.

  • It's simple- the pay plan is understandable and easy to explain to a finance manager and does not require an accountant to figure out. Admittedly, it does require careful consideration and thought to craft a matrix based pay plan and sell it to the dealer and finance managers, but it is well worth the effort, especially when it produces the desired results.

  • The plan accounts for our ancillary products by paying a Product Index bonus.

  • The plan rewards salesmanship and craft, but not at the expense of a pleasant customer experience.

The beauty of a matrix based pay plan lies in the ability to customize a multitude of variables:

  • The percentages in the matrix can be moved to pay more or less;

  • The Performance Index could be a sum of all of the F&I products offered (e.g. the following list of goals which could be represented on the y-axis as 185% of the top level);

  • Finance penetration could be factored in as well, encouraging the finance managers to improve their conversion rates if they are underperforming in this area.

What is the one given that we all know and we all hear endlessly as we go about our business in car dealerships as development agents? It is practically an axiom: finance managers will always work their pay plans. "...you almost don't have to manage them" becomes a self-fulfilling prophecy if the pay plan is designed to reward certain behaviors and discourage others.

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The perception of a finance pay plan that pays 15% and supports just average or even poor performance, when confronted with the reality of a pay plan that pays 20% but supports the dealer's goals, is obvious. It's our job to make the case.

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