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Pay plan too obscure, too 'spiffy'?

August 16, 2013
When was the last time the dealership pay plan was reviewed to make sure it accurately reflected current pay practices and policies, and adequately protected the dealership? Inadequately-drafted pay plans can create risks and legal liability for dealerships that the drafter never considered.
 
Saying too little can be as problematic as saying too much. For various reasons, including the “I don’t want to make the plan too complicated because my employees will not understand it” rationale, many managers deliberately draft pay plans to be as short and cryptic as possible, usually by omitting explanations and definitions.
 
And why shouldn’t they be brief? After all, everybody involved knows exactly what the pay plan means, right?
 
When a plans says that a salesperson will get 25 percent commission on the “gross profit” for new-car sales, what possible controversy could there be? Since everyone knows the intent, what’s the need to explain what constitutes a sale, when a commission is “earned” and payable, what number or numbers are used when calculating the 25 percent commission, or what “gross profit” means in the context of the plan?
 
Unfortunately, “short and sweet” may create avoidable risks for the dealership because the person or persons (e.g. judge, juror, arbitrator) who may ultimately decide what the plan means or was intended to mean may have no idea what the dealer meant. Most pay plans are written to be read and understood by people in the retail automotive industry who know the industry’s terms and jargon, but the ultimate interpreter of the plan’s language will be a person or persons who may never have heard of an “up” or a “spiff.”
 
The risk of an unintended interpretation of the plan is increased by the chance that an arbitrator or judge may not let the dealer explain what he meant. Instead, the words on the paper will stand alone and be subject to a challenge or an unintended interpretation.
 
Terms such as “pack” and “spiff” seldom are used or heard outside the industry. Moreover, when terms such as “sale,” “gross profit,” and “chargebacks” are used without explanation or definition, the possibility exists for someone outside the industry to apply a commonly understood (outside the industry) definition of the terms.
 
Remember, “outsiders” ultimately will define the terms, and if the pay plan doesn’t provide guidance, that definition of “gross profit” may not be the one the dealer intended. When there is uncertainty or ambiguity as to the intent of the plan, the general rule of law is that the document will be construed or interpreted against the party who drafted it—i.e., the dealership.
 
Similarly, plans that offer bonuses, spiffs, guarantees and other incentives should explain what an employee must do to be eligible for the additional or guaranteed pay. If the plan includes a guarantee, the plan should be clear about the duration of the guarantee and that it is not a guarantee of employment. The plan also should define the circumstances when the guarantee will be paid or not paid in whole or in full, for example, when an employee misses work during the guarantee period.
 
Additionally, well-drafted pay plans often include language addressing minimum wage and overtime issues, where applicable, and any policy for recovering make-up pays. Such plans also include language addressing the employees’ timekeeping responsibilities, the process for questioning concerns about the calculation of their pay and a restatement of the at-will dealership.
 
A good test to determine if you have a good pay plan: Hand it to someone with no knowledge of the business and ask them to tell you what it means without any explanations from you. If that person has difficulty understanding it, it’s a safe bet a judge, jury or arbitrator will, too.
 
 

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