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Stick to the basics in developing pay plans

November 22, 2010
When dealers pause to assess their organizations, one area that always gets lot of attention is management pay plans. Recent tendencies suggest dealers use pay plan incentives in an attempt to micromanage certain management functions. Dealers want to know how to adjust pay plans to motivate the managers. That's a good question, but it's the wrong question. The question is wrong because compensation generally doesn't motivate people, it merely enhances an employee's satisfaction with the job. Motivation is an emotional force within each of us. What motivates one person may be a turn-off to another. It is up to managers to find the key to each individual's motivation and it is hardly ever money by itself. Some people live from one check to the next. Others save for a rainy day or retirement. Still others like to spend on flashy cars or jewelry. The Basics These represent different types of motivation, yet most car dealers try to pay their managers the same way. Rather than creating complicated pay schemes or fine-tuning incentives, it's best to stick to the fundamentals when it comes to crafting pay plans that work. Remember that employees are paid to perform a function, so it is the job function that drives the pay plan, not the perceived talents of anindividual. When looking at compensation that way, then, the first question to be answered is how much is this function worth in the marketplace? Next, dealers must decide how the person doing the function will earn the money. Approached from this angle, all pay plans become merely different ways of getting to the same place. In reality, most dealership pay plans will be some combination of salary and incentives. But some approaches really are better than others. Remember these three rules when crafting a pay plan: 1. Keep it simple. 2. Goals must be achievable and within the employee's control; the goals must also be important to the owners. 3. Significant achievements warrant significant rewards. A Good Pay Plan For purposes of this example, general managers in the dealer's marketplace earn $90,000 and $125,000 annually. Effective management pay plans should provide 60-70 percent of the target earnings as salary. Say $72,000 annually or $1,400 a week. That leaves $18,000 and $50,000 to be earned for performance. Important results for this dealer are net profit and unit volume, as well as development of the organization. The dealer and the general manager should sit down and develop financial projections for the year. In this way, any goals for the manager are agreed to jointly, as opposed to being imposed from the top without a manager's input. It is agreed that net income for the year should be around $1.2 million. New car volume should be 1,200 units and used cars will be about 720. Dealership development goals are discussed and specific targets are agreed to for training, CSI, and a new franchise to be added. The pay plan then looks like this: • $72,000 salary, plus bonuses to be earned as follows: • $15,000 for dealership net income of $1.2 million (paid monthly based on projections); • $15,000 for achieving unit volume (again, paid monthly based on projections); and • $15,000 for achieving the organizational development goals. If the GM achieves 80-90 percent of the target, he earns 90 percent of the bonus; 91-100 percent achievement earns 100 percent of the bonus; and achievement in excess of 100 percent of the goals yields 110 percent of the bonus. Significant achievement (in this case, exceeding the goals) provides income at the top of the target range. Conversely, hitting less than 80 percent of the self-determined goals would bring no bonus. The GM still gets the $72,000 salary, though. The plan follows all the rules. Pay is competitive and results are easy to track. The targets are important to the owner and within the control of the manager. Windfall gains or losses due to uncontrollable events are minimized. One more thing: Pay plans are merely one tool for good managers and should never be considered a substitute for management.