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Garry House

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Compensation Philosophy

A Consultant’s Approach to Developing Sound Compensation Strategies for Dealership Managers and Sales People

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There are today, and there probably always will be, as many different compensation plans as there are dealerships. That is the nature of our business: to be individualistic; to have a unique dealership culture reflected in the way we treat our customers and our employees. And management and sales pay plans are certainly a part of that unique culture.

To be effective, any dealership compensation plan must primarily focus on those areas for which the management or sales employee is accountable. The plan should provide motivation for the employee to continually achieve higher levels of individual or departmental productivity and profitability. And the plan must be fair to both the employee and the dealership under varying levels of operating performance.

Even the best-designed compensation plans sometimes result in an excessive departmen­tal compensation expense or in the manager or salesperson being paid too little…or both. However, when this happens, it is normally not the fault of the compensation plan itself; it is because the dealer principal fails to step up to the fact that current business conditions do not justify the current head count of managers and/or salespeople.

Businesses that contract with experienced professionals to evaluate and help plan how they should pay their people usually have happier employees and lower personnel costs. The Retail Operations division of NCM Associates, Inc. is one of the few automotive consulting firms which specializes in compensation planning and implementation. The following is a description of the methods we use to assist client-dealers in developing sound, results-oriented compensation programs for management and sales personnel.

Preliminary

The consultant must first gain an understanding of the dealer’s cur­rent compensation methods. Copies of compensation plans, together with the employees’ earnings history must be provided to the consultant. Additionally, the consultant needs to know how the various compensation categories relate to the dealership gross profit and expense structure. This information is gained from an analysis of past and current finan­cial statements and, if available, from future planning documents. The underlying focus of this preliminary phase is to clarify the dealer’s objectives. (Why is a change in compensation strategy desired?)

Definition of Consulting Engagement

The consultant prepares and submits a detailed “letter of engagement,” which establishes the parameters of the consulting project. This document includes, but is not necessarily limited to, (1) a statement of the project objec­tive(s); (2) a description of both the consultant’s and client’s responsibilities to the project; and (3) an estimate (by project item) of the engagement time, the associated consulting fees and expenses, and the completion date. One of the key statements in this letter is that both the consultant and the dealer agree to individually attempt to maximize the efficiencies of the consulting engagement so that the project is com­pleted on time, at or below estimated budget, without sacrificing the quality of the end product.

Determining and Forecasting Key Results Areas (KRA’s)

The consultant and dealer must identify and quantify each element for which the management or sales employee is totally accountable, and also those for which he/she is only partially accountable. The consultant then prepares a computerized planning model, depicting various performance scenarios involving the KRA’s. Using a “What If?” approach, the consultant assists the dealer in finalizing a Planned Performance Level (PPL). Where feasible, the respective manager or salesperson should participate in the develop­ment and finalization of his own PPL.

The final step in this phase is for the consultant and client-dealer to agree on individual and overall compensation philosophies and budgets. (What should this position cost? As a percent of gross? Per retail unit? In annual dollars? And what does this specific person expect, need, or deserve? Based on past performance? Based on past and current earning levels? Based on the competitive local labor market?)

Plan Development and Testing

Based on the decisions made in the previous phase (and building from the existing computer planning model), the consultant designs a compen­sation plan that attempts to match the dealer’s objectives at the Planned Perform­ance Level. This plan is then tested at numerous variances from the PPL. If necessary, the consultant modifies the plan so that it closely matches the client’s objectives over all possible performance scenarios. The consultant then provides the preliminary plan and test documents to the dealer for review. Frequently, further minor modification is required, accompanied by retesting and review. In some cases, the dealer may even negotiate this preliminary plan with the involved employee. The final planning and test documents are provided to the dealer to use for communication, implementation, and the permanent record file.

Plan Documentation

Depending on the client’s wishes, the consultant will, as an option, prepare a “long-form” compensation document for signatures of the employee and a senior manager. This document explains the compensation plan and the accountability philosophy in detail. Even if the dealer elects not to have the consultant perform this phase, it is strongly recommended that similar plan documentation be prepared in-house, executed, and filed for future reference.

Automated Plan Calculation and Presentation

The consultant will convert the computerized planning model into a “Plan Calculation and Presentation” tool using a pre-formatted Excel worksheet. With minimal operator input, this worksheet will (1) automatically calculate and present (for compensation communication purposes) current and prior performance and earnings by line item for a three month period; (2) project annualized earnings, assuming current month performance represents the monthly average; and (3) project annualized earnings pace, based on actual year-to-date earnings.

Implementation

This phase involves assisting the dealer, as necessary and/or as requested, in communicating and validating departmental objectives and individual com­pensation plans. The consultant also has the responsibility to “load the lips” of the dealer, prior to “selling” the plan to the involved employee. Each dealer has his own attitude about the consultant’s role in implementation. Some like to keep the consultant “invisible” during the entire engagement period; these dealers are prepared to take full responsibility for the authorship of any new compensation plans, and thereby accept full credit (or criticism) if the change is well-accepted (or cursed). Other dealers prefer to feature the consultant as the catalyst of any change, making him very visible from the beginning of the engagement; this allows the dealer to always take, or negotiate, a fall-back position. (“The consultant did it. It’s not my fault, but I’ll fix it!”) And some dealers elect to make the consultant visible only on a selective basis, par­ticularly in critical situations.

NCM Retail Operations believes that, where feasible, compensation planning engagements should be conducted on an off-site basis, strictly by phone, FAX, Fed­eral Express and U.S. Postal Service. On-site consultations relating to compensation planning are normally expensive and inefficient. On-site consultations are justified only when third-party credibility is necessary to make a smoother transition from one com­pensation plan to another.

Follow-up and Fine-Tuning

“The best laid plans of mice and men…”

No, life doesn’t always (or maybe ever) work out the way we expect it to. The same is true with the best-designed compensation plans, once they are exposed to the dynamics of the real world retail automotive business. If the basic parameters are sound to begin with, they will remain sound. But the details of the plan may need to altered to accommodate unforeseen, and uncontrollable, circumstances.

The consultant acknowledges an ongoing responsibility to ensure that each compensation plan he recommends fulfills the needs of the employee, as perceived by the dealer, and provides operational and financial results compatible with the defined client-dealer objectives.

To get in touch with an NCM Retail Operations consultant about this topic, or to learn more about NCM’s consulting services for auto dealers, call 877.497.2363 or email consulting@ncm20.com.

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About the author

Garry House

Garry House

Garry House is a dealership resources professional, providing consulting and training services in financial and operational areas.

Permanent link to this article: http://blog.ncm20.com/2014/02/compensation-philosophy/

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