Special finance has had a rebirth. SF companies have access to capital and are planning growth. The elite dealers and departments are thriving, many enjoying record months. Many other dealers have realized the market is righting itself and are making adjustments to get back in the game.
Throughout periods of restructuring when people are being shifted, promoted or hired, I get questions about compensation plans for the SF manager and/or SF department. Generally, what I hear is, “How are we supposed to pay them?” or “What is the benchmark for compensation for a SF manager?”
Unfortunately, the question isn’t quite that simple. As I tell people, the benchmarks are simple; it is how you get there that’s tricky. Pay plans for those involved in special finance are not one-size-fits-all. It really depends on several factors that are often unique to the dealership. You have to take into consideration: first, the job descriptions of those involved; second, the size of the department (including its relationship to the overall sales volume); third, how the department works or interacts with the rest of the sales team; and fourth, compensation models for that position within a certain market area. Finally, and perhaps the biggest challenge, is to ensure that the compensation plan of the SF manager does not create conflict with any other finance managers.
Let’s start with the biggest challenge first – conflict. There are three areas of potential (and frequent) conflict. Those are between the SF manager and the conventional finance manager, between the SF personnel and the prime salespeople, and between the SF manager and the rest of the sales team. Each situation is separate, but they are all caused by compensation issues.
Space won’t let me detail them all, but let me outline the first, and it will paint the picture for the rest. This is one of the most common situations I see occur. First, it seems that the majority of F&I managers are compensated on their own production. That production is generally centered around finance reserve and the sale of F&I products.
Not to be critical of the many F&I providers in the marketplace, but many of the compensation plans that are in place for the F&I managers have been created or modeled by these F&I providers’ representatives. Whether they are based on a points system, penetration ratios or something in-between, a typical F&I manager’s compensation plan will naturally be based on how effective the manager is in selling products (which the provider naturally benefits from). As long as we are talking prime credit deals, there is no harm in that. When we start talking SF, issues can begin to occur. Additionally, F&I managers are often compensated on gross profit per retail unit sold. This too, can be a source of conflict when dealing with SF.
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 idea being to incentivize 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) and still give them an incentive to add any back-end gross they can. This creates all sorts of conflicts. If an F&I manager winds up working a SF deal, their real goal seems to be to find a way 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 who is often perceived 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 to SF since at that point, even if the deal delivers, they lose any opportunity to earn income.
Now you have the other side of the coin for the F&I manager. Say they are turned a deal that was not identified on the floor, is structured poorly and is going to need a massive rewrite to even remotely have a chance to get the deal approved. At this point, if it is still their responsibility to work the deal, they have 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 ‘atta-boys/girls, it hurt the manager’s compensation to be the hero and put this deal together. Plus, it will have worsened their product penetration percentages and F&I gross per retail unit.
Let’s look at it from the other side. Let’s say the SF manager has done a terrific job in turning an e-lead into an appointment that has been kept. After reviewing the customer statement and credit bureau, the SF manager discovers the customer has a 540 FICO but has paid Ford Motor Credit 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 FMC, but [CONFLICT] if the SF manager does what might be best for the customer and the dealership by turning the deal over, the manager will receive nothing for their efforts outside of a pat on the back and maybe a gold star.
Another situation occurs when 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 media that drives traffic through the front doors instead of driving it to the SF department. The advertising accomplishes its desired results. People come to the dealership, and some visits result in sales. The problem is that if they wound up going through the prime side, SF not only receives no compensation, but worse yet, [CONFLICT] the advertising is charged against their commission.
It doesn’t take a brain surgeon to understand if any of the above-described conflicts exist that one person 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. There is always another loser in this case – the dealership – as the company loses the ability to maximize every customer encounter and risks upsetting potential buyers who may be strung along for days before being given the bad news that their deal was not approved. I see these scenarios happen time and time again, and I really believe sound compensation plans are one of the biggest factors as to whether SF will succeed in a dealership.
There is no perfect solution unless you scrap the conventional plans suggested by most F&I providers and make a percentage of both sides’ pay based off of total variable gross profit—something that generally only works in stores where a high percentage of the business is SF. Ultimately you must come up with a plan that incentivizes both sides to work together for the benefit of each other, the customer, and the store, and this includes the sales personnel as well.
If you are already in a situation of conflict and you have a star or two in place, the best you can do is see how they react to the idea of changing their compensation plans. If you fear you may lose them, it comes down to deciding if you’re willing to lose that person to build a better foundation or overpay that person while you begin to build a team around them.
Setting these potential conflicts aside, the benchmark for sales compensation and supervision compensation combined is still 25.6 percent of total variable gross profit. Additionally, there is an additional 18 percent paid of net F&I income. Based on (franchise) benchmark assumptions of $2,720 total deal gross profits, of which $730 is F&I income, total deal compensation could equal 25.5 percent of the total GP ($693.60) plus 18 percent of the F&I GP ($131.40) for a total of $825, which equates to 30.3 percent of the total variable gross profit.
Furthermore, additional departmental employees such as contractors, funders or other office personnel (or allocations) add another five percent of total variable gross profit. Finally, it doesn’t mean that all $825 per deal has to be tied directly to compensation plans. Some successful dealers will set aside a portion of that money to pay out as monthly incentives or contests to stimulate or focus the team on certain activities or sales.
How this all gets split up would then be based on the other four factors outlined above, and it doesn’t have to mean that F&I gets all 18 percent or is limited to only 18 percent. Look at the job descriptions; who is responsible for or controls what areas (particularly gross profit)? How much of your total store volume and gross is SF? If it is significant, then consider comp plans where 65 to 70 percent of each person’s respective compensation is a percentage of total variable gross profit and the balance from their performance of specific job descriptions. How does each person interact with the rest of the sales team? Are they “on an island” or are they working hand-in-hand with a blended floor? All these factors must be considered.
Finally, what is the going rate in the market? If elite SF managers earn $120,000 per year in your market (for similar job descriptions), a comp plan targeting $75,000 won’t get the person you are looking for even if that is what the benchmark might indicate. Similarly, there is no need to pay someone $150,000 per year if the top of the market is $85,000 in your area.
Space doesn’t allow me to elaborate or give further models for compensation, but since this is such a critical component to the success of a department, feel free to e-mail me at Greg@AutoDealerMonthly.com or call me at 941-927-8439, and I will do my best to give you some specific ideas of what has worked in similar scenarios.
Remember, a good compensation plan is one that works for all parties and is thought through in advance so that tweaking or modifying seldom needs to take place. Dealers and general managers should focus on the incremental net profits they are creating and not solely on the numbers that are on the checks they are signing. When that happens, everyone wins.
Vol. 7, Issue 8