News/Publications

Kicking the Tires on Your Sales Compensation Plan

May 20, 2016

Have you reviewed your sales team’s compensation model lately? If you suspect there’s room for improvement, give it a thorough inspection. Even small enhancements could lead to a happier, more motivated sales staff that’s more likely to stick around.

Best of both worlds?

Many compensation models exist. For example, 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.

In such a scenario, you would pay your sales staff 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 sales goals. Meanwhile, performance-based compensation add-ons help dealerships financially motivate sales staff to sell more vehicles at higher margins.

Where are the targets?

When structuring your sales compensation plan, start with a total compensation target and work backwards to create a plan that provides ample opportunities to hit targets.

For example, suppose your target compensation per salesperson is $70,000 annually. You could pay 40% of this ($28,000) in salary and give salespeople the opportunity to earn the other 60% in commissions and bonuses, structured as follows:

• A $200 commission per sale, payable monthly, and

• A $1,500 quarterly bonus if monthly sales goals are met or exceeded.

If a salesperson’s goal is to sell 15 vehicles per month, he or she would earn $70,000 per year if the goal is met every month ($28,000 plus $36,000 in commissions plus $6,000 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.

What does a good plan look like?

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. But, generally, you should resist this temptation.

Instead, pay for the position, not the person. Write a detailed job description and define the criteria that must be met for any of your salespeople to earn commissions, bonuses and SPIF payouts.

Also, keep your plan simple. If it’s overly complex, many sales staffers will get confused and frustrated. A rule of thumb: If it takes more than two minutes for a salesperson to explain the plan to his or her spouse, it’s probably too complicated.

Another key element: Ensure that sales goals and incentives are realistic and achievable. For example, if your dealership’s average salesperson sells a dozen vehicles per month, don’t make 18 sales the minimum level required to earn a commission or bonus. 

Any good sales compensation plan also will link sales incentives to overall dealership goals. 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.

Are we in a vacuum?

Sales compensation will vary somewhat in different regions of the country. But, to be competitive, you should generally strive to offer a level of sales compensation that aligns with the averages. In other words, don’t create your model in a vacuum.

The National Automobile Dealers Association publishes an annual study that gives members a good idea of the levels of compensation for a wide range of dealership jobs. In past years, the trade group has included the average total compensation for the positions of sales consultant, Internet sales consultant, Internet-Business Development Center manager and sales closer.

Is your sales force evolving?

Today’s salespeople need to evolve right along with the ever-changing auto industry. Your dealership will likely benefit if its sales compensation plan is as current and viable as the shiny new vehicles in your showroom.

© 2016