Article

Pay Plans: An Employee And Employer Evaluation

August 2006, Auto Dealer Today - WebXclusive

by Harlene Doane - Also by this author

The Employee View

Have you ever wondered is my pay plan fair? Is the grass greener somewhere else? Of course you have! Everyone thinks about their pay plan at some point in time. The question is: “How do you evaluate your pay plan to determine fair?"

A great pay plan has to be fair to the employee as well as the employer. Fair is a relative term since it means different things to different individuals. There is a fine line of balance between stupid, fair and greedy. Stupid is expecting something that is not merited or deserved; fair is an equitable exchange between parties for services delivered: greedy is expecting too much in return for lackluster results. Most employees and employers want what is fair.

Let's start with the employee's side of the coin and look at three key issues that can be deceiving when evaluating a pay plan.
First there is the region in which you live in. The region of the United States that you live in can have a significant impact on the annual gross earnings you can expect. The individual living in Hawaii or San Francisco requires a much larger annual gross earning than the same person requires in rural Mississippi, simply due to the cost of living in those areas. So to compare annual earning in different regions is not a good way to evaluate fairness unless you know how to adjust for cost of living.

The second thing to consider is the job duties versus the job title. To compare pay plans from one dealership to another has to be done with an examination of the underlying job duties. One dealership calls a position the Internet Manager, another calls it the Internet Director, but if you look at job descriptions they are identical. So although they have different names, you would expect similar earning potential because they do the same job.
 
On the other hand, the Internet Manager at one store could really be a sales person with Internet duties while the Internet Director oversees multiple store locations and all aspects of a large Internet Department. As you can see, these individuals would, more than likely have pay plans that were significantly different. Comparing job titles can cloud your comparison.
 
The third thing to consider is the structure of the pay plan for commissions. It really means nothing! Ten percent of all gross and 20 percent of front end gross might mean the same thing depending on the store. The auto industry is proficient at designing unique pay plans. What's really important is what they total to at the end of the year in gross earnings. Don’t evaluate your pay plan on structure unless it’s just to determine that it is too cumbersome to calculate accurately.
 
The last thing is the pay plan itself. This is the big picture. A pay plan is not just about the amount of money you take home, nor is it about the amount of gross earnings in box 1 of your W-2. It’s not that those items aren’t important it’s just that they are usually only a part of your pay plan. Any pay plan must be evaluated as a whole for the value it provides to you.
 
Consider all of the following: gross wages, demo or demo allowance, cell phone allowances, medical premium payments, dental insurance, life or disability insurance, 401K, flex spending accounts, medical reimbursement accounts, service discounts and the list can go on and on. Each one of these items has a value to it. View the pay plan in light of all of these items and the value as a whole. Sometimes we hear that ABC motors is paying $50 more per unit and think it’s a better deal. You could be earning $400 to $600 more per month working for them. Later we find that ABC motors provided medical coverage, but at the expense of the employee and you have to pay to drive a demo. At the end of the month which one is really better?
 
Sometimes we take for granted the conveniences that our employer provides. They really are an important factor of your pay plan. Does your employer allow you to detail your vehicle on your own time at their facility? Do you pay discount rates on your personal vehicle repairs? How much time does your service department save you when you don’t have to take your vehicle anywhere else? Does your employer provide lunch on certain days? If your employer provides a demo for you to drive, how much are you saving a year in repairs, maintenance, insurance and payments on one of your own? What if another employer doesn’t offer all of that? It sheds a different light on things.
 
You must evaluate what is important to you. If you are male, young and single your only focus may be the gross earnings. If you are middle aged, married and have a family, medical benefits and retirement savings might be the most important issues. What is fair depends on what your needs are and how you can meet them. There are also the intangible items that you can not put a value on that affect the way you feel about your pay plan. Do you like the environment you work in? The people? The atmosphere? Is the commute too far? Do you like the scheduling? How many hours do you work? These items have no monetary value but they have a significant impact on your view of your pay plan and many times are the driving factor in why we consider changing jobs in the first place.
 
A fair pay plans really boils down to one thing; are your needs (not wants) whatever they are being adequately met in exchange for an above average job done well? Be honest with yourself about the job you are doing.
 
The Employer's View
Are my employees being compensated fairly? Have you ever been asked that question? Ever had an employee approach you for a raise? Can you answer without information? Not likely. Let's look at the information the employer needs to evaluate compensation plans.
 
First of all you need to, or have your controller, office manager, or payroll clerk, compile a report. This report should have each employee on it. In addition, it should have ALL forms of compensation on it, not just W-2 wages. Gross wages from last year's W-2 wages is a good place to start but it is just the beginning. You need to list and add to it each form of benefit you provide to your employees and the value. If you provide medical insurance, how much does it cost you per employee? This may take a little time if you have age/sex-based insurance. Other benefits might be demo or demo allowance, cell phone allowances, dental insurance, life or disability insurance, 401K, flex spending accounts, medical reimbursement accounts and service discounts. Don’t overlook all the mandated things you must pay for your employee-unemployment taxes, Social Security, Medicare, workman’s compensation, state funds. Only after you have this can you start to evaluate your pay plans. Some dealers or GM's may find this to be a real eye-opener if they have never viewed the entire cost of an employee.
 
The next step is to look to others in your industry. You should be able to get an idea of general pay ranges and benefits in your market for similar positions. Twenty groups members are a good venue when you compare like size dealerships. They can be especially helpful when it comes to benefits provided in the industry.
 
Do you provide enough benefits? What is your participation ratio for those benefits? Participation is a big indicator as to what your employees need. Pay plan success is all about filling the needs of your employees.
 
Now that you know what you provide and have an idea of what others provide, you review job descriptions, expectations and performance levels. It’s amazing how many employers don’t have job descriptions to go with measurable performance levels. That is a whole series by itself, that we won't cover here.
 
How complicated is the pay plan? Can it be easily communicated to any employee in less than five minutes? Can the employee easily calculate and anticipate their pay? If you have to answer no to these two questions you need to look closer at the structure of the plan. There is a lot of positives to the "keep it simple" pay plan.
 
If you have all of this, it is time to sit down with each employee. Share the entire pay plan package with them. Some employees will have no idea how much their compensation is because they only look at what they take home. Cover job descriptions and expectations. Then ask the employee to evaluate their performance (it works better if you can get the employee to evaluate their performance before the meeting).
 
Now you are down to the nuts and bolts. Is your company profitable? Is your company where you want it to be? Can you afford any increases, keeping in mind that without your employees your business does not operate? Are your employees at the top of the market pay, middle or lower end? Is your turnover rate low or high? Is this employee giving you 100 percent on the job? When the employee is at work do they look for ways to increase the company bottom line? Do they do their job well? How difficult would it be to hire and train someone to do their job?
 
By the time you have answered all of these questions and completed the analysis you already know if you are fairly compensating your employees and your employees will know as well. In addition your employees will have a new appreciation for the whole system of cost and expectations that cause the dealers and GM's to walk the fine line between stupid, fair or greedy when they put compensation values on positions in their dealerships.
 
The goal is always to be fair to both the dealer and the employee. Have you achieved it?

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