Passing the Buck: Pay Plan Pitfalls

Passing the Buck: Pay Plan Pitfalls

The fastest way to create unhappy employees is to change their pay plans so that they have to work harder to make the same money. You may protest that this never happens in our industry. The truth is it happens all too often, leaving a huge void in the talent, integrity, and expertise our industry needs.

Traditionally, F&I managers have been paid solely from the additional profit they generated from service agreements, credit life insurance, and aftermarket products. However, the world of special finance is changing the game plan. Debt ratios, lender advances, and a dearth of down payment funds make it impossible to rely upon F&I productivity to generate an adequate income for the producer.

F&I efforts make it possible for lenders to approve special finance deals. Ironically, the F&I profit margins are eliminated in these approvals. When senior management’s refrain is “too bad, better luck next deal, and oh, by the way … thanks for getting the deal bought”, the F&I manager feels as if a bus has just rolled over them. And guess what? The next deal creates the same circumstances – special finance and no back end. How motivated will an F&I manager be when the luck of the draw brings a month of deals such as these? And yet it is through their efforts that the sales department made the unit count for the month!

The gross profit of any deal is only as solid as the ability to get the deal funded. Low credit scores require a discount fee, limited profits on service agreements, and no additional back end products. Let’s face it, the profit in the deal is in the front end. And for the record, it needs to be in these cases.

Pay plans indirectly tell employees what is important to the employer. Let’s consider two common pitfalls.

Pitfall #1: Paying solely on a flat percentage of F&I profits. This plan indicates that senior management does not care how the income is generated. It is very easy to place all the profit into reserve. There is no real need to sell anything to the customer since this is the rate they qualify for. If they want the vehicle, they sign the papers, leave the premises, and get the deal refinanced a short time later. The consequences of this pitfall are early payoff, lost of reserve profits, and a customer who may be wondering about other overcharges in the transaction. The end result appears on CSI scores.

Pitfall #2: Paying only for individual production. What happens when the department has more than one F&I manager? What happens to the deals on a manager’s day off or during a vacation? When you pay your managers only for their own production, you will also need to determine if all the deals and all the customers are handled in a timely fashion. How motivated would you be if you were expected to do another employee’s work for free? Until someone figures out an equitable pay plan for team performance, each of us expects to be paid for all the work we do.

The best way to avoid these pitfalls is to develop a 3-pronged pay plan based on Production, Penetration, and Profit Per Retail Unit.

Production: This compensation area should include either a percentage of total sales and F&I income or a bonus on vehicle unit volume. This part of the pay plan keeps the manager interested in the sales department’s progress for both units and gross profit. The manager can also see how the F&I bottom line contributes to the bottom line on the dealership’s financial statement.

Penetration: The percentage of compensation should derive from the level of penetration achieved for all F&I products. Create a matrix of all the products and levels of penetration. Assign a point level to each penetration level. The point level will clearly communicate what is important to senior management.

Pull the reports monthly to determine penetration levels for each product. Add up the points. The total will indicate the percentage of income the managers will receive from the profit of F&I and sales income. F&I managers should receive some compensation from the sales department. This can be a small percentage of income or a unit count bonus.

Profit Per Retail Unit :The manager should be compensated with a dollar-per-dollar bonus on profit per retail unit. You may want to specify a minimum number of retail units for this bonus. For example, if the average for all their deals ended up at $1,500 profit per retail unit on the back end, the manager would receive a $1,500 bonus for the month in addition to the percentage of income on department profitability.

When you reward your F&I managers in each of these areas, you will also optimize production, balance penetration percentages, and increase profit per retail unit. You will have a pay plan you will not need to change over and over. You will compensate your managers for production, and the more they make the more the dealership will earn. All of your F&I products and services will be presented to customers. Profitability and customer satisfaction will increase as a result.

World of Special Finance, July 2002, p. 16-17.