Are Your Compensation Plans at War?

Oftentimes, the analysis of compensation plans leads to modifications (right or wrong) of those plans. While you many not realize it, these very compensation plans may be creating conflicts within your dealership or sales department that can implode any action plan that you (or your special finance manager) lay out.

Certainly, no dealer or executive-level manager ever sets out to create a compensation plan that intentionally conflicts with that of another; however, it often happens. The following are situations you must guard against, along with some recommendations on how to correct the problems.

Special Finance Manager v. Finance Manager
This is one of the most common situations that I see occur. First, it seems that the majority of F&I managers are compensated on their own production. That production is generally based around finance reserve and the sale of a variety of F&I products.

Many of the compensation plans that are in place for the F&I managers were created or modeled by F&I providers’ representatives. Whether they are based on a points system, penetration ratios or something in between, the typical compensation plan for an F&I manager will naturally be based on how effective they are in selling products. As long as we are talking prime credit deals, there is no harm in that. It is when we start talking about SF deals that issues can arise. Additionally, F&I managers are often compensated on gross profit per retail unit sold. This, too, can be a source of conflict.

On the other hand, I see many times when the SF manager is paid a percentage of the front-end gross profit on a SF deal and perhaps a smaller percentage on the back end. The mindset seems designed to motivate the SF manager to find as much front-end gross as possible (which can’t be charged back if it winds up as a repossession) while still giving them an incentive to add any back-end gross that they can.

Here we have created all sorts of conflicts. First, let’s look at the basics. If an F&I manager winds up working a SF deal, their goal could be to get the deal placed through a prime finance company so they have the opportunity to sell as much product as they can (to a customer that often seems malleable to anything that results in them getting financed). If they see any opportunity to place a deal, there is very little incentive [CONFLICT] to turn the deal over to SF at that point; they lose any opportunity to earn income.

Now, you have the other side of the coin for the F&I manager. Say they turned a deal over to SF that was not pre-qualified on the floor and was structured poorly, a deal that will need a massive rewrite to have a remote chance at approval.

At this point, if the F&I manager is still charged to work the deal, he or she has virtually no incentive [CONFLICT] to make the deal happen. If they get it done, there is a strong chance that the finance company will limit or eliminate the back-end opportunity. While the dealership has moved a vehicle and the F&I manager may get a load of praise, it actually cost the F&I manager money to be the hero and put this deal together. Additionally, it will have hurt their product-penetration percentages, as well as their F&I gross per retail unit.

Let’s look at it from yet another perspective. Let’s say the SF manager has done a terrific job in turning an e-lead into a kept appointment. After reviewing the customer statement and credit bureau, the SF manager discovers that they have a 540 FICO but have paid GMAC like clockwork on two different loans. The smart move may well be to move the customer to a new vehicle and place the loan back through GMAC, but [CONFLICT] if the SF manager does what might be best for the customer and the dealership, they will receive nothing for their efforts outside of a pat on the back. Why would they ever want to turn over the deal to prime?

Another situation occurs where the SF manager is paid on the “net” of the SF department, which would include netting out advertising expense against department gross profits. All is well and good until the SF manager allocates part of the budget to broadcast mediums that ultimately drive traffic through the front doors but not to the SF office. The advertising accomplishes its desired results—people come in, and some of the leads result in sales. The problem is that if customers wound up going through the prime side, the SF department not only receives no compensation, but worse yet [CONFLICT], the advertising is charged against the SF department’s commission.

It doesn’t take a brain surgeon to understand that if any of the above-described conflicts exist, one person (or department) must lose in order for the other to win. This type of environment, even in the best of organizations, tends to breed discontent and infighting, and there is always another loser in this case—the dealership. The company loses the ability to maximize every customer encounter and runs the risk of upsetting potential buyers who may have been strung along for days before being told their deals were not approved.

So, what is the solution? While I absolutely abhor changing comp plans, sometimes that is the only option. Ideally, you want both parties focused on the same goals. In my stores, I based approximately two-thirds of the comp plans for the F&I manager and the SF manager on the same goal—combined front and back gross profit. That way, each had a vested interest in making the deal and doing so with the maximum available gross profit. The balance of each of the comp plans was driven by the performance of their top item or items on their job descriptions. For conventional F&I, I added bonuses for penetration levels of extended warranties/service contracts, as well as F&I gross per retail unit (adjusted to our own benchmarked expectations). For SF, the manager’s additional bonus was calculated on SF volume, as well as average gross per retail unit.

With the lion’s share of their compensation based on total variable gross profit, the incentive was present for both to work all deals in the most efficient way possible. With the performance bonuses for each being set on levels that were within our own targeted guidelines, the bonuses were deemed fair and both parties strived to attain them, but never at the expense of a car deal or the other party. Managers were working together, not on separate agendas.

SF Sales Personnel v. Prime Sales Personnel
The same challenges exist when it comes to sales personnel. Two situations will exist. First, some dealers feel that since they have to pay a SF manager to make the deal, they have to take something away from the sales team in order to keep compensation in line. They often will adjust the compensation for the salesperson to receive a flat of $150 to $200 per SF deal, or reduce the compensation to pay them (for example) 15 percent as opposed to 25 percent of the commissionable gross profit. Think about it. If you were a salesperson, which type of customer would you be more excited to work with? What type of result do you expect if the salesperson is less excited to work one type of deal? Who are you kidding?

Most dealers recognize that if a person is not trained to work with a SF customer or, worse yet, does not want to work with a SF customer, then when the opportunity to work with a SF customer occurs, it is wasted. Dealers thereby surmise that it is beneficial to make sure customers with sub-prime credit are turned over to the appropriate personnel within the store. In order to ensure this takes place, they offer an internal referral fee where the sales person is paid $200 to turn such customers over.

On the surface, it would seem that this philosophy should work. Basically, the process would reward a salesperson for doing nothing other than identifying a subprime credit customer and referring them to the SF manager (who then sells the customer a vehicle). The problem is that the average sales compensation on a deal ranges between $385 and $525, depending on whether the sold vehicle is new or used, which doesn’t count what is received from the manufacturer in the case of an accompanying sales incentive program. The average salesperson will typically look at the difference between what they will earn if they are successful and what they [CONFLICT] might receive if the SF manager makes the deal. This makes them think, “I will take my chances on the customer being a prime-credit customer and swing for the fences,” especially if there is any conflict between the F&I manager and the SF manager. Again, in their eyes, you are penalizing them to sell a SF deal.

The solution is pretty simple – don’t ever create a situation (whether real or perceived) that there is a disincentive for the salesperson to work with a customer who has subprime credit. The comp plans should be the same. Your gross profits in SF should be greater than your average prime credit deal gross profits. That is good! You want more of those deals. Don’t be penny-wise and dollar-foolish. Do what is necessary to pay your sales personnel in a way that motivates them to quickly vet out the SF customer and work the process properly.

SF Manager v. the Rest of the Sales Team
The last area of conflict that I often see is between the SF manager and the rest of the sales team. By far, the most common configuration is a separate SF department with one person (or perhaps two) championing the SF effort. Often a dealer will hire or anoint this person and create a pay plan that works fine for everyone initially (the first ten deals or so), but then becomes very lopsided in favor of the SF manager [CONFLICT] as the department tries to grow.

The benchmark for total compensation for a SF department is slightly more than 25 percent of total gross. A number of dealers will thereby assume that if they are just starting a department, they can pay one person 25 percent of their total SF gross. The benchmark for productivity is 15 deals for one person if they are handling all aspects of the deal, with 18 being a superlative effort. To grow past that you absolutely must add people and/or involve the balance of your sales team. Where is their compensation going to come from?

If you really do have a benchmark SF manager who is handling 15 to 18 deals per month, it becomes an extreme challenge to approach them and say, “In order for us to grow your department, I need you to take a pay cut.” If this person is selling 15 to 18 units per month at benchmark gross profit, they are generating between $50,000 and $60,000 per month in total SF gross. That means in some stores they are earning as much as $15,000 a month. You will have to be very talented to approach that person with a pay cut and expect them to be excited to grow the department.

Additionally, comp plans seem to be one of the worst-kept secrets in the industry. How long does it take for someone in sales or management to learn how much money the SF manager is making? If that figure is significantly more than the sales manager, F&I manager, GSM or even GM, how do you think that sits with them? I am not, by any means, saying that the SF manager should make less than any of the sales management team, but if it is significantly disproportionate, their esprit de corps and spirit of cooperation will deteriorate. You will find yourself capped out in the department, not because the business isn’t there, but because you are battling against a damned-if–you-do/damned-if-you-don’t SF manager pay plan.

So, what is the solution? If you are already in this situation, the best you can do is take the temperature of your star, and make a decision. You must either be willing to lose that person to build a better foundation or be willing to overpay that person (and sales compensation in general) while you begin to build a team around them.

Summary
Compensation plans are vitally important for a strong organization. They have to be win-win. If one side is at a significant disadvantage for a sustained period, that side will not be happy, and even if the relationship doesn’t end, results will be compromised. As I said before, I abhor changing compensation plans, but if you are in one of the above situations, you must either make the change or expect the same results. Before you ever establish a new compensation plan or change an existing one, you must explore all the potential ramifications. Not only should you examine what happens in the worst-case and best-case scenarios, but you need determine what the impact of establishing a new comp plan will have on everyone involved both directly and indirectly.

If you ever create a comp plan that is unfair to one side, creates conflict or gives a disincentive for someone to sell an SF deal, you will not have harmony within your sales team and will never reach the potential that lies within your dealership. Avoid the conflict and you won’t have a war to win!
 
Vol. 2, Issue 3