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Designing Effective Pay Plans for Fixed Operations

When I meet with RV dealers, pay plans are a frequent topic of conversation. During the meetings, the most common questions are:

  1. 1. How are you paying your manager?
  2. 2. What are you incentivizing?
  3. 3. What percents are you paying?
  4. 4. Is it working?
  5. 5. Are you thinking about changing the pay plan?

Here are my thoughts on pay plans. The most important function of a pay plan is that it should be an accurate reflection of the job description. For example, if the most important part of the job is to generate or increase gross dollars; that should be a key element of the pay plan. If consumer satisfaction index is also important to the position, a piece of the pay plan should be on customer satisfaction. If the net profit of the department is important and the manager controls expenses, this should also be incorporated into the pay plan.

I also believe that it is very important to get every employee possible on an incentive or commission-based pay plan. It is not possible with all positions, but if you use your imagination, you can get nearly every RV dealership employee on an incentive pay plan.

A crucial step is to “Do the math.” RV pay plans are like snowflakes; no two are alike. You can’t simply take another dealer’s pay plan or one of my suggestions, put it in place and expect it to work. Without first doing the math, at least one party to the transaction will be unhappy. I recommend that you work backwards. Determine the fair pay and do the math on the pay plan to work towards that number.

I also like to use SMART pay plans. SMART is an acronym as follows:

  • S – Simple – Keep the pay plan simple to use and calculate.
  • M – Measurable – The elements of the pay plan need to be easily measurable.
  • A – Attainable – The goals need to be within reach or stretch the employee.
  • R – Relevant – The employee must have control of what he is paid on.
  • T – Trackable – The employee must be able to track the pay plan on a daily or weekly basis.

The use and development of SMART pay plans is important, but it would take another article to fully discuss the implications of doing it both correctly and incorrectly.

Fixed Operations Manager – This position needs to be paid on a percent of the gross or the net of the fixed operation. I feel it is a good idea to pay on both gross and net. It is vitally important to work backwards on this, but it is not difficult. Take your gross and net from last year. You need to determine a fair pay for the position. The incentives should be based on 50 percent for gross performance and 50 percent for net performance.

Take the gross and net figures and plug in percentages until you get a good balance that meets the criteria of being fair. If you are paying a monthly salary, this needs to be taken into account. Therefore, if the manager exceeds expectations, all parties make more; if he meets expectations, he makes the fair pay; and if the departments underperform, then he makes less.

If the fixed operation manager or any of your managers job descriptions do not include expense control, you should focus the pay plan on gross only.

Also, you need to be aware that a net pay plan can be open to manipulation, so both parties need to be very clear on what expenses are going into the net.

Service Manager – You have two options with service managers. Without being repetitive, you should set up the service managers pay plan like the fixed operations mangers pay plan (described above). I truly believe that a good pay plan will pay the service manager on both the performance of the service department and the performance of the parts department. The incentive percent needs to be higher on the performance of the service department than on the parts department.

As we know, there are built-in conflicts between the two departments. When managers are paid on the same basis, these conflicts are minimized or even go away. This one idea will dramatically improve communications in your fixed operation.

Shop Foreman – The best plan for a shop foreman needs to be based on total hours produced or total gross produced by the shop. I have seen some dealers pay a shop foreman based on a combination of the hours produced by the shop and the hours that they produce individually. I believe that this flies in the face of the job description of the shop foreman. He should be involved in training, dispatching, assisting in tough operations, and mentoring. If he is paid on what he produces, he will not be effective at these key job functions.

Technicians – The most profitable RV service departments have their technicians on a flat rate pay system. It is not even close. When flat rate shops are compared to straight time shops the differences in productivity and efficiency are enormous.

Flat rate systems are not easy to administer, but the rewards are substantial. To move from a straight time shop to a flat rate shop, I recommend that the techs be paid on a guarantee with increasing tiers at higher performance levels. Another method to use is to offer your best tech or techs the option of whether they would like to be flat rate or straight time at the end of each month for a three or six month period. If done properly the flat rate pay will be higher and techs will choose that pay system when they realize that they can make more money.

I also think that your pay plans should treat technicians more like salesmen. It is important to have spiffs, contests and incentive programs. It is also important that you keep these programs fresh. Any spiff or contest that runs for any length of time will be perceived to become part of the pay plan.

Service Writers – The best way to pay service writers is on hours sold and parts sold. The incentive portions should be split evenly between hours sold and parts sold. When paying on hours sold, some dealers will exclude internal hours. I prefer to have them in the pay plan. At a minimum, the incentive portion of the pay should be 50 percent. The most successful dealers are paying this position at 100 percent commission. This can either be paid on a percent of the labor sold or a dollar amount for each hour sold.

Warranty Clerk – This job needs to have a significant portion of their pay plan on warranty dollars collected. I suggest that one third to half of their pay is on warranty dollars collected. I also suggest that you pay monthly bonuses on attained levels of unclaimed warranty and aged warranty dollars over 60 days.

For example, if you determine that this job should pay $36,000 and you collect approximately $25,000 in warranty per month, set up a $2,000 per month salary and an incentive of 4 percent of collected warranty. To keep warranty from become uncollected, you can pay $100 per month for keeping warranty receivables under 60 or 90 days and another $100 for claiming all warranty within 15 or 20 days.

Parts Manager – My suggested pay plan for the parts manager is the same as the service manager. However, I would make the incentive percent on the parts department performance higher than the incentive percent of the performance of the service department.

Some dealers charge back the year-end write-off to the gross portion of the incentive. So as not to make it onerous in one month, the charge is spread over several months on a year. Almost all RV dealers have experienced a shortage when they do a physical inventory, so many dealers will set a level of acceptable write offs and base the incentive on this numbers. In this way, the parts manager may make additional monies if the write-off decreases.

Parts Counterman – A good way to pay parts countermen is an hourly rate plus a bonus of parts gross. Some dealers exclude warranty and internal gross in their counterman incentive. This depends on the job description of the employee. If they are strictly responsible for counter sales, I suggest that the incentive be strictly based on counter sales.

To improve this pay plan, add service gross as a portion of the incentive. This will minimize or eliminate the natural conflicts between the counter and the technicians.

Shipping/Receiving Clerk – I have not been able to figure out an incentive program for this position. I suggest this is an hourly position.

Body Shop Manager – In an effort to not be repetitive, my recommendation would be to pay them as you would the service manager. If I were to make a change, I would incentivize them on new accounts. Unlike the service manager, the body shop manager is responsible for bringing in new insurance accounts.