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Are Your Sales Department Pay Plans Properly Balanced?

Written By: Garry House
Posted on March 18, 2014

More frequently than you might expect, one of our 20 group moderators, Retail Operations consultants, or NCM Institute faculty members gets tagged as an “industry expert.” It happened to me in the March 10th, 2014 issue of Automotive News in an article entitled “What’s an F&I Pro Worth?” and authored by Jamie LeReau. Jamie’s commentary focused on F&I producer compensation and the fact that these folks now make more than sales managers and most other dealership managers (as reported by NADA for 2012). Since I have a reputation as being outspoken on this issue, Jamie called and asked for my opinion. Fortunately I wasn’t misquoted, and here’s essentially what I said:

"The typical F&I producer today sits in his office and waits for somebody to bring him something. A sales manager has to manage the activities of his sales team and deal with five potential customers before he closes one. There's a lot more skill involved in becoming a successful sales manager than in becoming a successful F&I manager. F&I managers are overpaid, and sales managers are underpaid.

There needs to be a change in the balance. Pay plans have not changed with the times, especially now that consumers are researching vehicle prices online. Transparency in pricing is enabling consumers to negotiate cheaper car deals, resulting in thinner profit margins on car sales and lower commissions for salespeople. While pricing transparency is good, it can keep salespeople (and managers) from getting a ‘fair shake.’

We have not adjusted to transparency with our compensation plans. Our formulas are flawed. Dealerships struggle with how to tweak compensation formulas to make them more equitable. Most F&I managers are compensated based on a matrix percentage calculated from two factors: (1) their product penetration, meaning the number of F&I products they sell, excluding financing, against the number of people they see; and (2) the F&I dollars earned per retail vehicle sold at the dealership. Their compensation has typically been based on just the income that F&I produces.

Today, though, some dealerships are looking at blending the revenues of all departments on the variable side of the business ‒ new-car sales, used-car sales, and F&I—and paying the managers of those departments a percentage of that blended number. These stores are trying to put everyone on the same pay line."

So why is there a compensation misalignment in so many of our sales departments? We need to look at how we got here in the first place, so let’s go back a few years and compare “then and now.” The following table, Two Months…20 Years Apart, will help explain why we’re here today.

Two Months... 20 Years Apart

Units & $PVR Metrics
Metric Category Descriptor 1994 2014
Combined New & Used Retail Unit Sales 150 150
Front Gross (Conventional) $1,275 $850
Net Financial Services Income $525 $1,025
Total Unadjusted Gross $1,800 $1,875
Total Unadjusted Gross $270,000 $281,250
Hard Packs (Reported in Other Income) $375 $175
Doc. Fees (Reported in Other Income) $195 $495
Mftr. Incentrives (Reported in Other Income) $0 $325
Total Gross in Other Income $570 $995
Total Gross in Other Income $85,500 $149,250
Total Adjusted Gross ("Super Gross") $2,370 $2,870
Total Adjusted Gross ("Super Gross") $355,500 $430,500
Personnel Metrics
Compensation Category Descriptor 1994 2014
Salesperson Count (Including BDC) 15 18
  Average Compensation $4,000 $4,000
  Total Compensation $60,000 $72,000
  % of Adjusted Gross ("Super Gross") 16.88% 16.72%
F&I Producer Headcount 2 2
  Average Compensation $6,500 $12,000
  Total Compensation $13,000 $24,000
  % of Adjusted Gross ("Super Gross") 3.66% 5.57%
Sales Management Headcount 3 3
  Average Compensation $10,000 $10,000
  Total Compensation $30,000 $30,000
  % of Adjusted Gross ("Super Gross") 8.44% 6.97%
Total Variable Compensation $103,000 $126,000
  % of Adjusted Gross ("Super Gross") 28.97% 29.27%

I would first like to draw your attention to lines #3 and #15 of the table. Back in 1994, the “$1,000 PVR Club” was only a wish or a dream for most F&I producers, and F&I product vendors and trainers were recommending that dealers pay their F&I producers 15% - 18% of Net Financial Services Income. Today many F&I producers are achieving $1,000+ PVRs, yet many dealers are still paying out 15% - 18% of Net F&I Income in compensation. Do these F&I producers today deserve nearly twice the compensation they earned in 1994? Are they twice as good as they were in 1994? Are they dealing with more customers per month? Do they have to work harder than they did in 1994?

I think you’ve probably answered “no” to these four questions! In fact, you may even be saying to yourself, “Wow, we’ve really even made the F&I producer’s job a lot easier over the last 20 years…improved processes, better technology, more product offerings, shortened deal cycle time, etc.”

From a compensation philosophy standpoint, my current preference is to pay all F&I producers and sales managers on the same pay line (probably line #9), with their individual percentages determined from an individual performance matrix. If you disagree with me, I’d like to know what you think!

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