A Thoughful Velocity Question From an Executive at Honda Canada Inc.

What follows is a thoughtful question and my response from an executive at Honda Canada Inc.

Hi Dale,

I enjoyed your presentation at the AutoRemarketing Conference in Toronto last week. It was very well done and the audience was quite impressed.

I wanted to take a moment of your time to ask you for your opinion on pay plans. We now have many Honda and Acura dealers in Canada subscribed to vAuto through Trader Canada. Many of them are achieving great success and becoming true “velocity” dealers.

Unfortunately, despite their success, some are still having difficulty with understanding that in order to get their staff 100% on board, pay plans need to change with the times. What types of used car manager and salespeople pay plans work best in a “velocity” environment? I understand part of the pay plan should be based on turn, but what about the idea of compensating the used car manager on a % of internal service GP? I ask this because many of our dealers have high reconditioning ($1500 – $2000 per unit), which with higher volume and faster turn is great for the GM / DP, but not so much for the used car manager who often sees the service department as his foe, and not his friend because reconditioning eats into his compensation. I am a big advocate of looking at used vehicle contribution to total dealership profitability, (used front end gross, F & I, and service gross), but many dealers prefer to continue keeping everything in silos, compensating managers on individual department profit. What are your thoughts on this?

Daniel,

Thank you for your note and I completely agree with your thoughts.

To be sure, velocity success is a journey that calls into question many current dealership practices. Specifically, compensating the UCM on a percentage of internal GP will only serve to put the UCM’s interest on the same side (to a certain extent) as the service manager. In reality, the right answer is to have the service department respect the used car department as they do their most important customers. That means fair pricing and fast, high-quality service. Over time, service managers at velocity dealerships understand that they make more money by internally servicing more used cars, albeit at a lower rate. In other words, the velocity principle of making more by charging a bit less works for internal labor/parts as it does for used cars. Therefore, the compensation program that needs to be adjusted to address internal used car work is that of the service rather than the used car manager.

Regarding velocity salesperson compensation, ideally there should be a mix of incentive for both volume and gross. The gross profit incentive, however, should not be based on the gross profit of the deal after negotiation, but rather this portion of the incentive should be based on how little gross had to be given up between the asking and the final transaction price. In other words, if the salesperson sells the vehicle for the asking price, they earn the full commission, and to the extent that the vehicle needed to be discounted to arrive at a transaction, the commission is discounted proportionally. Remember, that when cars are priced properly, documentation can and should replace negotiation.

Many dealers in the US have begun to measure and manage the amount of negotiation/discount and some have adjusted their pay programs accordingly. For such dealers, the average amount of discount has shrunk to no more than $200-$300.

Used car managers should be compensated in part on the number of retail turns. Consider a case where one dealership sells 150 used units in a month and the dealer next door sells 60 retail used. Which one did a better job? What if I told you that the dealership that sold 150 units averaged 300 in stock that month and the dealership that sold 60 averaged 50? I think you get the idea from this example.

Further, used car managers should be compensated on total gross rather than average gross. In the US, in most states, dealers can measure their sales as a percentage of total market sales registrations. If such similar metric is available in Canada, this too should be incorporated into the UCM’s compensation. Consider the case where a dealership that averages 100 used cars per month, sells 150, is that a good job? What if I told you that that same dealer normally accounts for 1% of its market of used car sales, but in the month in question, their 150 unit performance accounted for only 3/4 of 1%? Again, I think you get the idea.

These are only some ideas for consideration, but I think you get the point that simple traditional metrics of volume and gross profit are not the best or most complete measurements of performance assessment. Hope this helps.