Effective Salary And Commission Structures

How do you motivate your team to increase sales at the same time as containing employee costs?

BDO Automotive has recently finished collecting data for this year’s dealership executive salary survey.

With an anticipated release date of December 2014, it is timely to consider the essential elements of an effective salary package, especially with ever-increasing pressure on dealership profitability and the management of expenses.

Dealerships rely on their team interacting with customers in order to generate sales. Every sales dollar that comes into the dealership is a result of someone selling or doing something.

So how do you remunerate your people to maximise performance now and into the future?

Generally an effective salary and commission structure is one that aligns the goals of the employees with those of the dealership. This is somewhat complicated when we consider the five departments of a dealership and the different personalities and skill sets required to be successful in each.

The previously held belief that employees are motivated solely by money has been disproven. Many studies show that non-monetary factors are often more important, such as work culture and work/life balance. A recent Macrothink Institute study, Impact of Employees Motivation on Organizational Effectiveness, has shown that personal empowerment and employee recognition are key factors for enhancing motivation.

Whilst the strategic goals of each dealership owner will vary, high on everyone’s agenda will be the goal to generate acceptable financial returns. For that reason, key drivers for profitability are what your team should be rewarded to achieve, not only for the dealership, but for themselves.

The challenge here is that increased profitability is achieved through increasing sales, decreasing expenses or both. So how do you motivate your people to increase sales volumes at the same time as containing employee costs? One strategy is to achieve the right balance between the employee’s base wage, or retainer, and the commission component.

The commission component is the ‘at risk’ component and should be structured to reward your team for achieving results that are consistent with the strategic (i.e. long term) goals of the dealership.

Our view is that the retainer is compensation for the process (e.g. completing paper work, introductions, tidiness, personal presentation, etc.) and the commission is the reward for the result (e.g. the number of new and used sales, the level of gross profit and CSI score).

The balance between the retainer and commission will be dependent on the dealership’s circumstances, such as geographic location, franchises and labour market forces; however, the ‘at risk’ component should reflect these circumstances. It is essential that the commission component has the right balance in rewarding both sales volume and gross profitability, and also incorporates the strategic goals for the dealership. For example, it would be easy to incentivise service advisers to increase sales and gross profit, yet this may promote behaviour that erodes customer satisfaction and retention.

Indeed, there is no ‘one size fits all’ remuneration package; however listed below are common themes in all effective packages:

  • A ‘right’ balance between the retainer and commission component
  • A ‘right’ balance in rewarding sales volume and gross profit
  • The ‘at risk’ component should reward the result, not the process
  • Implementing strategic goals (e.g. CSI, Factory Targets, Retention and Dealership Growth)
  • An easily understood and measured process
  • Employee buy-in options
  • Achievability, with the right amount of effort

A dealership is a complex business, characterised by high turnover and low margins.

Employee expenses represent approximately 60% of a dealership’s gross profit, so it is important that these costs are both effective and controlled.

A successful remuneration package serves to motivate employees towards greater financial returns for themselves and the dealership, whilst ensuring that the employee costs are comparable to market in an industry with very little ‘margin’ for error.

Effective packages need to also consider non-monetary incentives available subject to the application of Fringe Benefits Tax (FBT).

There is no template remuneration package suitable for all dealerships. Whilst the goal of maximising financial returns is consistent, the focus points to achieve this will vary to some extent, and the salary package should be tailored to reflect that.

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