Article

Buy Here Pay Here Pay Plans that Produce!

September 2006, Auto Dealer Today - WebXclusive

by Jim Rhoads - Also by this author

As a consultant in the arena of Buy Here Pay Here, I have received as many requests for assistance on the subject of pay plans as on any other matter. Having been an employer and an employee, I have seen the benefits of good pay plans and have witnessed the consequences of bad ones. I am always happy to direct clients away from these potential pitfalls. A well-devised pay plan will reward valuable employees and encourage them to stay with the company. A good compensation plan will also motivate employees to increase production, while the best pay plans will provide some credit for longevity and boost employee morale.
 
In BHPH, since profits are forthcoming and most of the challenges do not come from the selling side of the business, it is imperative that a pay plan be balanced. A BHPH pay plan that is weighted too heavily on sales gross is downright dangerous.
I recommend bonus pools that generate amounts based on a combination of sales and collections. Such pools should include all members of the staff with percentages assigned based on job function. For example, the manager might receive 30 percent of the bonus pool while others receive 15 percent or 20 percent based on level of responsibility. Don’t worry about the percentages being well known; it is preferred that the split of the bonus pool be posted for all to see. The accumulation in the pool should be updated and posted routinely, if not daily. Teamwork is improved when all members of the staff know that everyone benefits from the accumulation in the bonus pool. Also, it often happens that employees who fail to make an equitable contribution to the team objectives are persuaded by co-workers to increase production. Less productive members of the staff are quickly elevated, or ultimately eliminated, under this plan.
I suggest a bonus pool that accumulates approximately 60 percent of its proceeds from actual money collected and the remainder from gross profits. This type of distribution works well in new operations and mature ones. In a new operation, the bonus will be driven by gross in the early months and later by collections. If you are among those dealers who can project cash payments for a month or a given term with a degree of accuracy, it may be helpful to create a scale that provides more compensation for collecting a higher percentage of expected payments.
 
There should be no qualifiers or limiting factors on a bonus plan or any other incentives offered. Every dollar of gross should add to the bonus pool and every payment dollar collected should have an impact on the paycheck. You want employees hustling to build on these numbers right up until the last minute of the last day of the month.
 
Incentives based on delinquency rarely produce the desired results. In fact, they are often counter-productive. A small bonus or reward is fine, but a manager who has to achieve a certain delinquency level in order to reach their desired earning mark will often be frustrated. Delinquency is a fact of life in this business. Reward the manager who leads a team that banks a high percentage of expected payments even if delinquency fluctuates in a reasonable and manageable range. Intelligent managers recognize that unresolved delinquency ultimately results in charge-offs that deplete the gross profit pool so they will have sufficient motivation to act on delinquency. A periodic spiff for delinquency is probably a better solution.
 
With approximately 60% of the pool being built from success with the bank deposits, employees soon realize that it is in their best interest to avoid deferring payments and to make contact with delinquent customers to resolve issues promptly. The brightest managers understand that adding quality-financed sales contributes to today’s gross profit and tomorrow’s cash flow. By compensating on the profit and loss reports generated at the dealership, the staff will be motivated to maintain healthy margins on all retail and wholesale sales and maximize income in other areas including loss recovery, interest income, back-end profit, etc.
 
The desired total compensation less the amount of bonus estimated to be paid from the pool determines the portion of an employee’s compensation that comes from salary, which should remain confidential. The local market and the job description of that position will establish the total compensation. Managers should be receiving at least 30 percent of their compensation from bonuses earned with production.
 
Be careful when constructing a bonus plan, as this is where many dealers begin to get in trouble. Keep the pay plan simple! Elaborate pay plans often compensate people fairly and perhaps even generously, but if a compensation plan is too complicated for each and every staff member to be able to know their precise earnings at any point in time, then the motivation factor is lost. This is very important. Employees must be able to easily obtain the figures necessary to quickly calculate their own bonus. Employees are not motivated when a bonus appears on their check without them knowing what occurred to create the bonus or, more importantly, what they did to impact the figure.
 
By utilizing a simple pay plan that is driven by the numbers that are essential to your profitability, it is possible to boost company morale, motivate employees to go farther, encourage quality employees to stay and achieve company objectives all the while. This can be done without having to exhaust so much time following employees around with an iron fist.

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