Should you revamp your sales compensation model?

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 a decade 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, this tends to minimize the need for a traditional salesperson.

Given this, 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 minimizes 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 often 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.

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 take the form of a formal written contract with your salespeople. This will give you something to refer back 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 compensated for their skills and performance, while helping your dealership keep your payroll costs under control.