As a consultant to the outdoor power equipment industry, one of the biggest mistakes I see made in dealerships across North America is how employees are compensated. As I work with dealerships, I encourage them to re-evaluate why they pay their employees the amounts that they pay them, and if the compensation plan they use drives the results they are looking for.
I can’t tell you how much money I have wasted in the 25-plus years I have been in business because of compensation programs that just didn’t deliver the results I was trying to get out of my employees. In most cases I overpaid for the results I received—which left me feeling like a fool at the end of the year. I was working more hours than anyone else, but was making less money in some cases. Yet I had all the risk!
In the beginning I believed that if you paid employees well, they would appreciate what you were doing for them and drive harder to help make the business a success. I was wrong! In all but a few circumstances, I paid-out more, but got less performance and whining employees who didn’t appreciate what I had done.
As I work with dealers today, I take the lessons that I learned and try to help apply them in their dealerships to drive the performance they need to reach the success and profitability they are striving for.
Let's use the service department to look at four compensation programs that exist in dealerships today, and evaluate how each will impact the overall success of the dealers that utilize them.
It’s important to understand that I am going to be dealing with some generalities, and that there are going to be variations you may have on these compensation plans in your own dealership that make them work for you. If that is the case and you feel your compensation program gets you the results you are looking for, then don’t change it.
1. Straight hourly pay
The most common compensation program in dealerships today is paying technicians an hourly rate. It ranges anywhere from $9 per hour to $25 per hour, and in most cases is based upon how long the tech has been working at the dealership.
The upside is that it is very simple to administer. The downside is that there is no incentive for the tech to drive performance. In many cases the dealership ends up overpaying a tech with lot of years of attendance (notice I didn’t say experience) and underpaying a younger tech with good experience but not many years of attendance.
2. Percentage of labor hour
In this comp plan the technician will get a percentage of the labor hours produced. So if the tech bills-out one hour of labor and the rate is $70 per hour, he would end up with a percentage of that $70. The percentage varies a lot by dealership, I have seen it as low as 20% and as high as 50%.
The upside is that if the tech doesn’t bill-out any labor, he doesn’t make any money and the dealership doesn’t have any labor cost associated with that tech. Also, any comebacks are totally at the tech’s expense.
The downside is that the techs are now like straight-commission salespeople. Thus, you don’t have a lot of control over what they do. If they want to hustle and make money today, they will. If they are tired from a long night out and decide to kick back, your work flow will suffer.
The other challenge is that when you start paying out 40-50% for labor, your labor cost-to labor sale ratios get way out of line. Your target is to keep your base labor cost at no more than 35% of your labor sales at 100% efficiency.
Paying techs a weekly salary is not a very common compensation program, although over the years I have seen it in some dealerships. It's simple to manage. However, I have seldom seen it work effectively.
The challenge with salary in any position—whether it is service, parts, sales or management—is that it breeds complacency. If you only make so much, and your future salary is controlled by someone and determined by some arbitrary method, it’s hard for most people to strive to perform.
4. Hourly rate plus bonus based upon efficiency
In this compensation program the tech is paid an hourly rate based upon their level of experience. For example: C-level tech $8-10, B-level $10-13, A-level $13-15. The remaining money they earn will be based upon the level of efficiency they reach. The minimum level is 85% while the top level is 125% and higher.
In this plan the tech has the ability to make an increasingly larger bonus per billable hour based upon their speed and training. The down side is that it takes a little more time to keep track of the efficiencies for each tech, and the dealership needs to move to a heavier percentage of flat-rate repairs.
The upside is a strong drive by the techs to reach higher performance—which produces more dollars for the dealerships and faster turn times for the customers.
Regardless of how you currently compensate your people, you owe it to yourself and your dealership to take some time over the next few weeks and ask yourself if it motivates your people and drives the performance you are looking for. If not, make some changes as you move into next year.
Remember, your goal is to push your dealership and your employees to produce the results you are looking for—and to help you maintain your competitive position in your market.
Bob Clements is the president of Bob Clements International, a consulting firm that specializes in the development of high-performance dealerships. His organization works hands on with dealerships throughout North America, helping them attain the personal freedom and financial wealth all entrepreneurs strive to achieve. For more information, visit bobclements.com.