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In addition to monitoring their sales mix, their new and used inventory turnovers, and their gross margins for new and used equipment, dealers interested in optimally managing their sales department should also continually monitor their sales personnel compensation.

Sales salaries and commissions as a percent of gross margin dollars are calculated by taking the total sales salaries and commissions paid to the dealership sales force and dividing that number by the total new and used gross margin dollars generated by that same sales force. Ideally, this number should be 25% or less, and never exceed 35% of the gross margin dollars.

Using the data from the SouthWestern Assn.’s “Cost of Doing Business” study, the average sales salaries and commissions as a percent of gross margin dollars for the average dealer in North America during the last 3 years for which the data was available is revealed in the table below.

Although higher than the recommended benchmark, this writer believes that the sales compensation as a percent of the gross margin is nevertheless woefully understated. Many dealers and sales managers actually engage in the selling process, i.e., they actually “sell machinery.”

In those cases, the “Cost of Doing Business” would include their sales and gross margins into the overall departmental numbers. However, in their annual questionnaire, the Cost of Doing Business report does not include the dealer or sales manager’s compensation into the sales salaries and commissions, but instead, includes their compensation into different categories. Removing the dealer generated gross margin dollars would increase (negatively) this metric.

Conversely, the primary reason why this metric has averaged 32.69% since 1982 is that far too many dealers continue to pay too much to get too little in return; and that is ostensibly a function of a misguided compensation plan. Too many dealers continue to pay their salespersonnel on the basis of salary or cash difference. Neither of these compensation plans is designed to positively impact, or increase, the wholegoods gross margin. Instead, these compensation plans are designed to reward order takers for poor performance.

This is the year 2014 and there are only 4 reasons why a dealer would pay a salesperson on the basis of salary or cash difference. First, they don’t know any better. And if this is the reason, they should get out of business quickly. Second, they are resistant to change. If this is the reason, they should either read Booth Tarkington’s Pulitzer Prize-winning 1918 novel entitled The Magnificent Ambersons, or watch Orson Welles’ movie adaptation of the novel that was nominated for Best Picture in 1942, to see first-hand what happens to a proud family incapable of change.

The third reason for retaining an atavistic compensation system is that the sales force is comprised of automatons and the dealer/sales manager lacks the courage or the wherewithal to replace such cretins. If this is the reason, then reread the first solution in the previous paragraph.

The fourth and final reason why many dealers continue to pay their salesperson on the basis of salary or cash difference is they can’t stand the thought of the salesperson making a lot of money. This is myopic. Never worry about how much you pay out, but focus on what you get in return. This metric will reveal that many dealers are paying a lot for very little.

Dealers interested in getting the most for their money while concomitantly managing this important metric would be wise to initiate a compensation plan that pays salespersonnel on the basis of the gross margin that they generate. Those sales people who have a propensity to sell on price will not generate very much income. Conversely, those salespersonnel who sell value and generate the highest margin will in turn receive the highest compensation. This is not an egalitarian compensation plan, but rather a compensation plan based on performance.

If the benchmark is 25%, then dealers and sales managers interested in staying within this guideline should consider paying their salespersonnel 25% of the gross margin they generate; or 20% of the gross margin on new and used equipment sales with a small salary to make up the difference. This is a compensation plan that will align compensation and gross margin while simultaneously attracting contemporaneous field marketers and discouraging the traditional order taker. Isn’t this what all dealers and sales managers should be striving to achieve?