Solving the Compensation Plan Puzzle
Employees Need to Be On the Same Page and Incentivized
This MTD exclusive was provided by tire and auto industry veteran Randy O’Connor, the executive director of TEN (Training and Education Network). He can be reached at roconnor@10missions. com. For more information, see www.mtdten.com.
Throughout my career, I’ve had a diverse array of roles, including store manager, area manager, district manager, business consultant, associate director, director of operations, executive director and vice president.
Of course, each of those positions had its own unique set of benefits and compensation plans. Some were well-written and others not so much.
As the years have passed, it’s become glaringly apparent to me that the relationship between the compensation/benefit plan and the execution of the role was super-important.
As a matter of fact, speaking from both first-hand experience and my observations of thousands of pay pIans, I can tell you that the design of your compensation plans has as much to do with achieving your business goals as with the skills and work ethic of your employees who are doing the work.
Recently, compensation has been a very hot topic. The local car wash is advertising $15 an hour, plus cash tips. WalMart’s average hourly rate is $15. Amazon is averaging $18 an hour for warehouse workers. Add to that the seemingly endless press coverage of wages and labor and everybody believes their value has gone up.
The pressure you may be feeling because of the wage and hour disruption occurring now is understandable. But this is another example of how disruption can be turned into opportunity.
Let’s say you just decided to give your three general service technicians a raise from $12 an hour to $14 an hour. You either felt like it was fair or you felt like you had to. Either way, you did it and you’re not alone.
You’re also not alone in two other ways. One, our industry has a pretty consistent set of pay plans. General service team members get hourly, plus some spiffs. Technicians get a flat rate. Sales advisors are hourly, plus receive some type of sales commission. Service managers are either hourly/salary, plus commission. And managers are either salary/hourly, plus commission.
What’s also pretty consistent is the number of dealerships that perform at or under 5% net profit annually.
Let’s run some numbers. You’re a $2.1 million a year location operating at 52% gross profit. Your payroll runs 48% of gross profit and your non-payroll operating expenses run at 24% of sales. Your net is 3%.
Throughout the year, the three general service techs mentioned earlier clock 6,000 regular hours, plus 750 overtime hours. Your payroll just went up by $14,625. If everything else remains the same, your payroll just went from 48% to 49% and your net just went from 3% to 2.3%.
If that doesn’t seem fair, you’re right. It’s not fair to you or your business and it isn’t sustainable. It’s the “all-else-remains-the-same” part of the equation that you should be questioning. That’s where the design of your pay plans and the opportunities in a disrupted market I mentioned come into play.
After more than 20 years working with independent tire dealerships, plus big box and private equity-owned shops, I want you to remember the following:
Quid pro quo. People value money and respond positively to incentives. Rewarding certain behaviors with something that your employees value will reinforce the behavior and encourage more of it. The sales cycle should determine what percentage of total compensation should be base versus commission. Quid pro quo compensation structures are the most successful structures for sales-driven revenue models.
Alignment. A well-designed pay plan starts with budgets and goals. Your annual business plan should have outlined your budget for a given position. That same business plan should help you outline specific measures needed from the position to achieve your financial performance goals. Aligning budget with goals is a natural next step. The key to execution is making sure the commission portion of your business’ pay plan focuses on the most important outcomes within a position’s control. Which pieces of the business within the employee’s control will have the biggest impact on the financial goal execution? For example, we all know that vehicle inspections drive sales. How many of your general service techs are paid on completing the inspection as opposed to sales from the inspection?
Also remember that when you hire an employee, you delegate a certain amount of control and decision-making ability to that person. Meanwhile, you retain ownership of your business’ assets and the liability for any losses. For example, you hire a new manager with a 10% share of net profits. While the new manager wants to maximize sales and gross revenue, you may decide you need to invest in new shop equipment.
As you plow through net profits with your investments focused on the long-term health of your business, the manager could feel slighted. Make sure everyone in your business is aligned on expectations up front.