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Should you revamp your sales compensation model?

March 4, 2015

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The automobile buying process is different today than it was in the past. With the Internet, buyers are usually more informed about vehicles they’re interested in than they were two decades ago.

This fact has fundamentally changed the role of the automobile salesperson. When customers walking in the door already know which vehicle they want to buy and how much they will pay for it, the need for a traditional salesperson is minimized.

Given this scenario, many dealerships are re-examining the proper role of their salespeople, as well as their sales compensation model. This is especially true at dealerships that have moved to a one-price, no-haggle sales model, which further reduces the need for a highly experienced — and highly compensated — salesperson.

A combination sales model
Instead of paying salespeople on a straight-commission basis, some dealerships are moving toward a sales compensation model that combines a base salary with performance-based add-ons.

A common example is to pay salespeople a relatively small base salary and then give them the opportunity to earn additional income via commissions, bonuses and sales performance incentive fund (SPIF) payouts. Many salespeople appreciate the financial security afforded by a steady salary, while still having the chance to boost their earnings if they meet or exceed their sales goals. Meanwhile, performance-based compensation add-ons help dealerships financially motivate salespeople to sell more vehicles at higher margins.

In structuring your sales compensation plan, it’s wise to start with a total compensation target for your sales positions. From there, you can work backward to create a compensation plan that gives salespeople the opportunity to earn the target if they’re successful.

For example, suppose your target total compensation per salesperson is $50,000 annually. You could pay half of this ($25,000) in salary and give salespeople the opportunity to earn the other half in commissions and bonuses, structured as follows:

  • A $125 commission per sale, payable each month, and
  • A $2,500 quarterly bonus if monthly sales goals are met or exceeded.

If a salesperson’s goal is to sell 10 vehicles per month, he or she would earn $50,000 per year if the goal is met every month ($25,000 plus $15,000 in commissions plus $10,000 in bonuses). The salesperson could increase this income incrementally by exceeding the monthly sales goal. SPIF payouts for meeting sales goals for specific vehicles also can be offered to further boost salesperson compensation.

What auto salespeople earn
Each year, the National Automobile Dealers Association (NADA) publishes a study that gives its dealer members a good idea of the levels of compensation for a wide range of jobs within a dealership. According to the 2014 NADA Dealership Workforce Study, the average total compensation for automobile dealership salespeople across the United States is as follows:

  • Sales consultant — $65,050
  • Internet sales consultant — $65,541
  • Internet/Business Development Center (BDC) manager — $81,914
  • Sales closer — $91,909

Sales compensation will vary somewhat in different regions of the country. However, to be competitive, you should generally strive to offer a level of sales compensation that aligns with these averages.

Compensation plan guidelines
Here are a few guidelines to consider when constructing your sales compensation plan:

Pay for the position, not the person. Sometimes it can be tempting to create a sales compensation plan for a specific salesperson, especially if you’re trying to lure a high performer to your dealership. Resist the temptation. Instead, write a detailed job description and define the criteria that must be met for your salespeople to earn commissions, bonuses and SPIF payouts.

Keep your plan simple. If your sales compensation plan is overly complex, many salespeople will get confused and frustrated. A rule of thumb: If it takes more than two minutes for your salesperson to explain the plan to his or her spouse, it’s probably too complicated.

Make sure sales goals are realistic and achievable. Unrealistic sales goals and incentives are another source of salesperson frustration. For example, if your dealership’s average salesperson sells 10 vehicles per month, don’t make 15 sales the minimum level required to earn a commission or bonus.

Link sales incentives to overall dealership goals. For example, if you want to boost margins, tie your incentives to vehicle profitability, rather than just volume. But if you want to boost dealership revenue, tie your incentives to sales of higher-priced vehicles.

Put the plan details in writing. Your incentive compensation plan should be a formal written contract with your salespeople. This will give you something to refer to if there’s ever any dispute about a salesperson’s earnings.

A fresh look at compensation
With the role of the automobile salesperson changing, it’s a good idea to take a fresh look at how your salespeople are compensated. Doing so will help ensure that your salespeople are fairly rewarded for their skills and performance, while helping your dealership keep your payroll costs under control.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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