Pay Plan Guidelines for the Sub-Prime Finance Department?
By Chris Leedom
After years of traveling the country and meeting with hundreds of dealers, I am still amazed at how the subject of pay plans still hinders the performance and growth of so many dealerships. I thought I might tackle this somewhat sensitive topic. My goal is to provide you with some no-nonsense guidelines that result in a win-win situation for the dealership and the employee.
If I had to name one area that I observe the most critical mistakes in a sub-prime finance department, it is in the area of pay plan structure. A critical miscalculation in this area and you risk losing a valuable producer of gross profit. So let's talk about how to avoid making these costly mistakes.
First of all, you must use what I call the "three scenario rule." By this I mean you must apply your pay plan idea to three different, and likely, scenarios. You must calculate the compensation based on baseline performance. This level should be the likely level of performance, not too high or too low. This is what you might consider average and acceptable performance. Then calculate the same pay plan criteria based on 65% to 75% of baseline performance. This level of performance might be unacceptable to you but may occur. Finally, calculate the same pay plan criteria based on 200% of baseline performance. What, "too high" you say? Not really. I have had a chance to observe quite a number of operations where the goal was to achieve 25 units per month in sub-prime sales and the actual production on strong months was double that number.
When you are checking your calculations and the resulting compensation, it is important to use compensation as a percent of departmental gross as the measuring stick. Let's look at an example. Let's assume we pay our special finance manager a salary of $2,000 per month and 6% of the departmental gross profit for sub-prime sales, including front and back end profit. Our objective, or baseline performance level, is 30 units per month at $2,000 combined front and back end profit per unit. By applying the above compensation guidelines, we arrive at the following:
Notice that as the production goes up, the compensation as a percent of gross actually decreases. So if I came to work for you and generated $250,000 in gross profit, don't worry about it under this type of pay plan. The compensation factor as a percent of gross will fall in line. The problem occurs when we try to "tweak" the pay plan in the 60-unit scenario above because the manager is now "making too much." My question is, relative to what? If the pay plan is properly designed, it will work at any level. Period.
The total compensation factor for the sub-prime finance department should come in at about 26% to 28% of departmental gross. This includes the management at about 8% to 12%, sales compensation for the sales person at 10%, and administrative at about 3% to 4%. These numbers will work whether you generate $30,000 or $300,000 of gross per month. I have dozens and dozens of clients at these numbers. You can do it, too. Good luck.
Christopher M. Leedom is a Professional Twenty Group Moderator with NCM Associates of Overland Park, Kansas. He is a recognized industry expert and trainer for sub-prime finance and is the Chairman and Founder of NCM's National Special Finance and Buy-here Pay-here Conference.
