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NCM Institute

Developing the right pay plan for service advisors

Mechanic wrench tool

Last week, George Gowen wrote about the importance of service advisors to retaining your customer base (Miss it? Check it out.) This naturally leads to the question: How much should I be paying them?

Taking Stock of Service Advisor Pay

Before you make any decisions about your dealership’s pay plan, you need to carefully evaluate the current market, as well as your budget constraints. In general, NCM recommends that you consider the following questions:

1.     What’s your philosophy towards advisor compensation?

2.     What’s the right amount to budget for advisor compensation?

3.     Should advisor productivity affect advisor compensation levels?

4.     In addition to monetary compensation, what other elements do you want to include in a well-balanced advisor pay plan?

What’s your philosophy towards advisor compensation?

Most dealerships have begun to view their service department as a “selling” organization, not just a “fix it and smile” division. When you take that philosophy, your compensation plans must focus on sales activities and results. To achieve this, your advisors will need to improve their customer R.O. transactional quality while decreasing their customer R.O. transactional quantity. This could result in the need to add more advisors.

What’s the right amount to budget for advisor compensation?

When it comes to service advisor compensation budget, NCM recommends using 12.0% of department gross (before any parts gross transfer) as the metric for budgeting service advisor compensation. This budget guideline may vary sometimes—a little higher for domestic franchises and a little lower for luxury franchises—but relating compensation to performance is an important step. And, remember: budgeting refers to how much you should pay, while structuring refers to how you could pay.

Should advisor productivity affect advisor compensation levels?

Advisor productivity is a critical component of compensation. You must clearly define this connection, and let your service advisors know that their income will be dependent on it. Set expectations and get their commitment to this approach. After all, it’s advantageous to them: an advisor with high transactional quality and CSI, could earn as much as 14% of the gross he/she generates; meanwhile, an advisor with below average transactional quality and CSI, might earn as little as 10%. When your service directors understand this, they will do what’s necessary to improve their pay.

What other elements do you want to include in a well-balanced advisor pay plan?

This is harder to answer. Here’s the thing: there is no “one size fits all” solution to automotive pay plans. What works brilliantly for one dealerships may be an absolute disaster in your shop. Each dealership has a different business culture that impacts pay plans. And your franchise requirements, personal priorities and state and local laws will all significantly influence the decisions you make on pay plans.

Structuring Service Advisor Pay Plans

While you must keep in mind that every dealership is different, here are the general recommendations that NCM has for any service advisor pay plan:


1.     Service advisor pay plan structure should be 100% incentive based, with a reasonable underlying guaranteed draw against commission.

2.     As billable hours is the force driving service and parts profitability, the main determinant for pay should be Hours Billed per Individual Advisor per Month, with $x.xx paid for each hour billed, in all labor categories. We’ve seen this as a stand-alone compensation metric, as well as combined with either customer effective labor rate or hours per customer R.O., sometimes both. This category might represent 55% – 70% of the plan structure.

3.     CSI Performance is usually the next element. The advisor should be rewarded for achieving world-class service. The payment can be quantified as “an additional $x.xx paid for each hour billed” (see #2, above). Depending on how much manufacturer money is tied to CSI, this category might represent 10% – 20% of the plan structure.

4.     Next up are the Spiffs and Incentives, which cover such things as: (a) Parts Sales per Customer R.O.; (b) Customer Effective Labor Rate; (c) Menu Closing Percentage; (d) Tire Sales; (e) Service Contract Sales; (f) MPI (ASR) Closing Percentage. The payment might be quantified as an additional $x.xx paid for each hour billed (see #2, above), as a flat amount or as a per item amount. This would represent approximately 15% of the plan structure.

5.     The final category is a Team Incentive based on Percent of Total Monthly Shop Hours Objective Achieved. The intent here is to have all service and parts personnel focus on one number—total shop production capacity— throughout the month. Their goal is to achieve or exceed full capacity operations. You may quantify the payment as an additional $x.xx paid for each hour billed (see #2, above) or as a flat amount. This should be about 7% – 10% of the plan structure.

Pay plans are tricky. What successes have you had in creating and implementing pay plan changes? Tell us below.


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Garry House

Are Your Sales Department Pay Plans Properly Balanced?


More frequently than you might expect, one of our 20 group moderators, Retail Operations consultants, or NCM Institute faculty members gets tagged as an “industry expert.” It happened to me in the March 10th, 2014 issue of Automotive News in an article titled “What’s an F&I Pro Worth?” and authored by Jamie LeReau. Jamie’s commentary focused on F&I producer compensation and the fact that these folks now make more than sales managers and most other dealership managers (as reported by NADA for 2012). Since I have a reputation as being outspoken on this issue, Jamie called and asked for my opinion. Fortunately I wasn’t misquoted, and here’s essentially what I said:

“The typical F&I producer today sits in his office and waits for somebody to bring him something. A sales manager has to manage the activities of his sales team and deal with five potential customers before he closes one. There’s a lot more skill involved in becoming a successful sales manager than in becoming a successful F&I manager. F&I managers are overpaid, and sales managers are underpaid.

There needs to be a change in the balance. Pay plans have not changed with the times, especially now that consumers are researching vehicle prices on the Internet. Transparency in pricing is enabling consumers to negotiate cheaper car deals, resulting in thinner profit margins on car sales and lower commissions for salespeople. While pricing transparency is good, it can keep salespeople (and managers) from getting a ‘fair shake.’

We have not adjusted to transparency with our compensation plans. Our formulas are flawed. Dealerships struggle with how to tweak compensation formulas to make them more equitable. Most F&I managers are compensated based on a matrix percentage calculated from two factors: (1) their product penetration, meaning the number of F&I products they sell, excluding financing, against the number of people they see; and (2) the F&I dollars earned per retail vehicle sold at the dealership. Their compensation has typically been based on just the income that F&I produces.

Today, though, some dealerships are looking at blending the revenues of all departments on the variable side of the business ‒ new-car sales, used-car sales, and F&I ‒ and paying the managers of those departments a percentage of that blended number. These stores are trying to put everyone on the same pay line.” 

So why is there a compensation misalignment in so many of our sales departments? We need to look at how we got here in the first place, so let’s go back a few years and compare “then and now.” The following table, Two Months…20 Years Apart, will help explain why we’re where we are today.

Two Months… 20 Years Apart

Units & $PVR Metrics


Metric Category Descriptor 1994 2014
Combined New & Used Retail Unit Sales  150 150
Front Gross (Conventional) $1,275 $850
Net Financial Services Income $525 $1,025
Total Unadjusted Gross $1,800 $1,875
Total Unadjusted Gross $270,000 $281,250
Hard Packs (Reported in Other Income) $375 $175
Doc. Fees (Reported in Other Income) $195 $495
Mftr. Incentrives (Reported in Other Income) $0 $325
Total Gross in Other Income $570 $995
Total Gross in Other Income $85,500 $149,250
Total Adjusted Gross (“Super Gross”) $2,370 $2,870
Total Adjusted Gross (“Super Gross”) $355,500 $430,500


Personnel Metrics


Compensation Category Descriptor 1994 2014
Salesperson Count (Including BDC) 15 18
  Average Compensation $4,000 $4,000
  Total Compensation $60,000 $72,000
  % of Adjusted Gross (“Super Gross”) 16.88% 16.72%
F&I Producer Headcount 2 2
  Average Compensation $6,500 $12,000
  Total Compensation $13,000 $24,000
  % of Adjusted Gross (“Super Gross”) 3.66% 5.57%
Sales Management Headcount 3 3
  Average Compensation $10,000 $10,000
  Total Compensation $30,000 $30,000
  % of Adjusted Gross (“Super Gross”) 8.44% 6.97%
Total Variable Compensation $103,000 $126,000
  % of Adjusted Gross (“Super Gross”) 28.97% 29.27%

I would first like to draw your attention to lines #3 and #15 of the table. Back in 1994, the “$1,000 PVR Club” was only a wish or a dream for most F&I producers, and F&I product vendors and trainers were recommending that dealers pay their F&I producers 15% – 18% of Net Financial Services Income. Today many F&I producers are achieving $1,000+ PVRs, yet many dealers are still paying out 15% – 18% of Net F&I Income in compensation. Do these F&I producers today deserve nearly twice the compensation they earned in 1994? Are they twice as good as they were in 1994? Are they dealing with more customers per month? Do they have to work harder than they did in 1994?

I think you’ve probably answered “no” to these four questions! In fact, you may even be saying to yourself, “Wow, we’ve really even made the F&I producer’s job a lot easier over the last 20 years…improved processes, better technology, more product offerings, shortened deal cycle time, etc.”

From a compensation philosophy standpoint, my current preference is to pay all F&I producers and sales managers on the same pay line (probably line #9), with their individual percentages determined from an individual performance matrix. If you disagree with me, I’d like to know what you think!

If you agree with my overall philosophy and would like some help developing new pay plans for your variable operations team members, you might wish to attend the class on Sales and Management Compensation on April 3rd and 4th at the NCM Institute Center for Automotive Retail Excellence in Kansas City. If you would like additional information please click here, or call Brandiss, Cassie or Elisabeth at 866.756.2620. I’ll be teaching that class together with Mark Shackelford and we hope to see you there.


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Garry House

Compensation Philosophy

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


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.


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.


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


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