In a time when cost management is at the forefront of most dealership managers’ minds, is it worth revisiting traditional commission structures in order to align employees’ interests with those of the business?
With employee costs representing the largest expense to a dealership – averaging 68% of gross profit – and quality staff becoming increasingly highly sought after, it may be the perfect time to consider whether both the employee and the business are getting the maximum return from their investment.
Salesmen are traditionally remunerated a fixed rate per unit sold, as well as a percentage of the gross profit achieved on the deal. But what about the holding costs of inventory, which have a direct impact on the bottom line of the dealership?
The average daily holding cost per vehicle approximates $40 (think advertising, floor plan interest and cleaning). Accordingly, if we can achieve a reduction of the ‘time in stock’ by just five days we can save the dealership $200 per vehicle. With the majority of holding costs made up by floor plan interest, this average will only rise as interest rates trend upwards.
As an industry we accept that when money talks, salesmen listen. Why not use this to the benefit of the dealership?
An example of how commission structures for both new and used salesmen could be used to minimise holding costs is the introduction of a scaled bonus commission for units sold within a certain period of time. For instance, if the average stock turn is currently 30 days, why not introduce a bonus linked to stock turn where, if the vehicle is sold within 25 days, the salesman is awarded an additional $50 on the unit? Once you factor in this additional commission, the business is still effectively making an additional $150 on the unit simply for selling it five days sooner. The financial downside to the dealership is limited as the salesmen must achieve the desired result before any additional commission is paid.
This is just one example of how a commission structure might be redesigned so that the goals of the salesperson are aligned to the goals of the owners.
For more discussion on this approach and assistance with the redesign of your commission structures, please contact Matt Adams of BDO Automotive on email at email@example.com or your usual BDO advisor.