by Greg Gerber
There are few topics in any small business that cause as much angst as employee compensation. While employees try to extract as much money as possible from an employer, every business owner seeks to pay employees a fair, competitive wage that also offers a motivating incentive.
More than just pay plans, employers need to develop a compensation strategy, especially when it comes to rewarding the people who generate income for the dealership.
Do they have control?
Employees can’t be expected to have a significant part of their pay at risk over things they can’t control, said Donya Rose, a partner with Cygnal Group and a specialist in helping companies create effective selling functions. “Salespeople must be paid on what they do personally to contribute to profitability,” she said.
Rose cautions employers that setting annual goals — and corresponding pay — too high risks demotivating employees. How fired up will an employee be in June if he thinks he has no chance to achieve annual volume numbers that must be reached before a bonus can be earned?
If something outside their control prevents them from making what they thought they would, salespeople are likely to just hang out at the dealership collecting their base pay or draw until next year, when the numbers are reset.
In some cases, a mid-year correction may be appropriate. “It’s rare for this to happen and employers must establish criteria in advance as to why it would be done,” said Rose.
Last year’s gas price crunch is a good example of that type of trigger. If sales drop unexpectedly, dealers will have more sales capacity than they need and layoffs may be necessary. “But, for people you decide are keepers, it’s important to share the pain with them, and for them to recognize you’re doing it so they stay with you.”
Affordability vs. market value
Employers must be mindful of market considerations or they risk losing the market value of a job. “Like it or not, all employers operate in a labor market and managers need to have a sense of the market value,” said Rose. “To keep good people, you need to consistently show them a path to get to their market value.”
Pay plans should be structured so some employees occasionally make 20 percent over the market value for their job, depending upon guaranteed income levels and the amount at risk. For example, if market value for a sales position is $50,000 and he gets a $25,000 draw, then 50 percent of his pay is at risk.
“For a 50-50 payment, it would be appropriate for a star performer to make two times the target compensation, or $100,000,” said Rose. “Other employees need to see that it’s possible for someone to make a lot even if they have a significant amount at risk.”
It’s just like picking stocks, Rose explained. People who select riskier stocks expect their investment to occasionally pay off with a huge return. People who don’t like risk are generally more comfortable in the bond market.
Pay for results, not activity
The ideal compensation plan is built on a foundation of key accountabilities, said Rose. It must be clear to employees what they are expected to do. But activity isn’t nearly as important as results.
“Ideally, a compensation plan measures directly into the income statement. You look at revenue, gross profit, contribution and other maps in a way that people understand. You measure based on activities, but pay on results.”
Basically, activities are things that are helpful tools for managing sales people. They’re the things good salespeople should do anyway to get better results. However, activity may not materialize into bottom-line results.
“If you pay for activity, you’ll get activities,” said Rose. “Some dealers may feel salespeople aren’t generating enough quotes, so they’ll pay salespeople to increase the number of quotes they generate. Sure, they can create quotes, but does that activity result in closed contracts and increased revenue? That’s what the pay should be based upon.”
Productivity should exceed compensation
A consistent mistake Rose said dealers make is they don’t realize that while compensation should go up over time, productivity should go up faster. The dealership invested a great deal of money on building market awareness, branding and creating a system to sell more each year — for which they need to earn a return on that investment.
For example, if a salesperson generates $500,000 annually and earns $40,000 in Year 1, by Year 10 he should make $80,000 to $120,000 but sell several million in product.
“When I get called into small- or mid-size companies, it’s usually because the owner discovered someone is making two times more than everyone else in the company,” she explained. “The business has changed, the dealership is well established in the market and there is a steady stream of customers coming in. They have the right stock on the lot and they’ve trained their salespeople to be productive. Yet, the sellers are still making money as if the dealership had 10 RVs on the lot and they had to convince customers to take a risk and buy from the dealership.”
The problem, Rose said, is that salespeople adopt the attitude that they are bringing in the money and should be compensated correspondingly.
But, the owner knows very well he could hire two salespeople who could be just as productive as the highly paid person,” she explained. “The uncomfortable message is that such a move would be better for the company. It’s better for the dealership to have two $1 million performers than one $2 million seller.”
Dealers don’t want only a few high-performing people, she explained. Otherwise the business’ ability to maintain a revenue stream is fully dependent upon one or two people. That makes the business worth less, Rose said.
“It’s contrary to what you would think would be true. If a dealership has a sales machine on staff, the business actually has less value to a potential buyer,” she explained. “If the sales volume was distributed among several good salespeople, instead of invested in one or two superstars, a potential buyer could see that he could reproduce the dealership’s level of success without risking that key performers would leave and start a competitive dealership.”
Dealers need to invest less in sales management and more in sales leadership. When a sales manager, team leader or even the owner himself “manages” sales, he makes sure proven procedures and processes are followed. A sales leader, on the other hand, motivates others and develops a sales machine with momentum of its own. He treats a sales team like he is pruning a bush, hiring and firing people and encouraging them to round out skills.
“Study after study shows the one thing that stands out most between an okay and a terrific sales force is the first-level sales leadership,” said Rose. “It’s a mistake to think that comp plans alone will manage salespeople.”
Rose strongly argues against requiring sales managers to sell, too. A selling sales manager has a tendency to cherry pick the best opportunities, which means they end up competing with their own staff for compensation.
“A sales leader makes sure leads go where they aresupposed to go,” said Rose. “It’s a rare person with a servant’s heart who can hand over a great sales lead to a deserving underling. It’s also a rare business owner who understands the need to hire not just any sales manager, but a sales leader who can sniff out good salespeople in ways owners can’t. He will ensure the right people are in place.”
Once sales leadership is in place, dealers become less reliant on the “magic” salespeople who command ultra-high salaries and basically hold the business hostage.
Who needs incentive pay?
Financial incentives are effective only with people or small teams that directly affect the bottom line in a clear way. For example, an accounts payable clerk who ensures bills are paid on time makes a big difference in cash flow.
“A dealer can take a peanut butter approach, smearing incentive pay like a thin film over the entire organization,” said Rose. “But to be effective, employees must feel they have some control over the amount they receive.”
Compensation is more than something given as payment for a service provided, it’s a strategy that when properly implemented can transform an okay dealership into a superstore staffed by superstars.
Donya Rose, CSCP, is Managing Principal of The Cygnal Group. She is a recognized expert in sales compensation plan design, regularly speaking at conferences and writing published articles. She serves clients from F500 to growth-stage businesses, and advises WorldatWork on sales compensation hot topics and best practices.