O'Connor: Time to Review Your Payroll Profitability Equation

Flat rate pay has long been a foundational compensation structure in tire dealerships. Designed to reward productivity, it operates as a form of informal profit sharing — anchored in the principle of quid pro quo: you produce, you earn. This system incentivizes technicians to work efficiently and delivers a win-win outcome when implemented correctly. Technicians have the opportunity to increase their earnings beyond a fixed hourly rate and dealerships benefit from faster turnaround times and higher output. 

At its best, flat rate compensation drives a high-performance culture. Each job is assigned a standard book time and technicians are paid based on how many of these jobs they complete.  

A technician who finishes a two-hour job in 1.5 hours still gets paid for the full two hours, creating a powerful incentive to work efficiently. For highly skilled technicians who are organized, precise and motivated, this system can be very lucrative. 

Historically, our industry has used the flat rate system for a portion of its technicians, usually only those turning out mechanical work that is referenced against one of several labor guides, while another portion of technicians have been paid an hourly wage with or without some sort of incentive. These incentives have ranged from traditional spiffs for selling a particular set of products or services to any number of financial rewards to reinforce particular behaviors. 

In the aftermath of the COVID-19 pandemic, many independent tire dealerships, like other businesses, faced acute labor shortages, rising inflation and increased employee expectations around compensation. In response, many owners began raising base hourly wages across the board — often out of necessity to remain competitive in the labor market. But in doing so, a critical mistake crept in: giving out raises without tying them to production or performance. 

This shift, while understandable in the short-term, is now causing a measurable imbalance. Across the industry, payroll expenses as a percentage of gross profit are rising more rapidly than gross profit itself. In other words, labor costs are increasing faster than the revenue those labor hours are generating. This undermines the very logic of flat rate pay, which has served tire dealerships well for decades. When technicians are given higher guaranteed hourly wages without an accompanying expectation — or structure — for productivity, the pay-for-performance model breaks down. 

What was once a flexible, performance-based system now risks becoming a bloated, less sustainable cost center. The danger is that some employees may no longer feel the same incentive to maximize efficiency or quality. The alignment between technician motivation and profitability weakens and a dealership’s culture of accountability begins to erode. 

Dealers must now re-evaluate how they structure pay and incentives to regain control of profitability. This doesn’t mean reversing wage increases — today’s labor market requires competitive compensation — but it does mean ensuring that increases are justified and supported by metrics. 

Here are some key considerations for re-establishing balance: 

• Tie raises to measurable output. If a technician is getting a raise, it should correspond with improvements in productivity, quality scores or ASE certifications. Compensation should reflect contribution. 
• Invest in training. Many technicians want to produce more, but lack the training or tools to do so efficiently. Dealerships that invest in skills development often see a strong return in the form of better, faster work. 
•  Reinforce quality standards. Build quality control into the flat rate model. Technicians should know that comebacks will affect their performance metrics and future pay adjustments. 
• Monitor labor-to-gross-profit ratios. Keep a close eye on how payroll costs are trending relative to gross profit. If that ratio is widening, investigate whether it’s due to wage creep, declining productivity or both. 
• Maintain accountability. Culture matters. Technicians should be proud to earn their pay through strong performance. Regular performance reviews, clear metrics and transparent communication will help reinforce expectations. 

Ultimately, flat rate pay is still one of the most effective ways to motivate technicians and align their goals with the financial health of the dealership. But its effectiveness hinges on thoughtful execution. When owners and managers step away from performance-based principles — especially by handing out raises without tying them to output — they risk damaging both their profitability and their dealership’s culture. 

By refocusing on accountability, quality and the link between pay and production, you can preserve the value of flat rate pay while navigating the realities of a changing labor market. It’s not just about paying more. It’s about paying smarter.