A Troubling Tale From The Tarmac

May 12, 2014

A colleague shared the single-side of a cell phone conversation he overheard this week as his return flight from the Digital Dealer conference in Atlantic City taxied to the gate at O’Hare airport.

The passenger in the seat behind him took a call from someone seeking a sales job. The passenger, who described himself as a dealership’s Internet manager, laid out the dealership’s pay plan, which prompted my colleague to take some notes:

2030-Bentley-concept-sports-car-pictures-2New Vehicles: The store pays a straight 20 percent commission on sales, with a $175 guarantee on no-gross deals (“Those are the ones we sell at invoice or need to blow out,” the manager explained to the caller.)

Used Vehicles: The manager broke down a stair-step commission structure: 12 percent on the first three deals sold in a month (e.g, 1-3 cars); 15 percent on the next four deals (4-7 cars); 20 percent on the next five deals (8-12 cars); and a retroactive 35 percent if a sales associate sells more than 12 vehicles.

The manager then explained, “If you sell a $3,000 deal at the beginning of the month, you’ll only make 12 percent, but it’ll be 35 percent if you sell more than 12 cars.”

My colleague shared this experience with me because he thought that I might write about the pay plan. He was correct. The pay plan is troubling to me on at least three levels:

1. It’s based on false assumptions and false hope. The first false assumption is that the sales associate controls the front-end gross profit on a used vehicle deal. As my father used to say, “you make your money when you buy the car” and, in today’s market, when you proactively manage the margin through your reconditioning, pricing and promotion. The second false assumption mixes a dash of false hope—that $3,000-gross deals are plentiful in today’s market.

2. It limits efficiency and productivity. The pay-plan’s gross profit-based foundation means that sales associates will inevitably go back-and-forth with managers to negotiate and close every deal. In this deal-by-deal environment, even the most efficient sales associate would seem to be hard-pressed to put more than two deals on the board in a single day. Over time, I suspect the best sales associates will leave, recognizing that the store’s pay plan and process makes it difficult to reach the magical 13-car threshold.

3. It de-emphasizes dealership profitability. The retroactive 35 percent commission in used vehicles strikes me as dangerous from a variable cost perspective—unless, as suggested above, no one ever hits the 13-car target. I don’t know of too many dealers or markets where a 35 percent commission on their used vehicle sales would leave sufficient after-expense profit to make the original investment in the vehicle worthwhile.

In addition to these issues, the pay plan also suggests a lack of pricing transparency and an in-store sales experience that isn’t likely to satisfy customers who’d rather know they’re getting a good deal in a short amount of time than to spend hours negotiating the price of a vehicle.