While the last installment of this column documented the general characteristics of a well thought out compensation plan, this column, and a few to follow, will address the three most prevalent forms of salespersonnel compensation. The series will conclude with a radical approach for progressive dealers who want to “think outside of the box.”
The first form of salespersonnel compensation addressed takes the form of a straight salary. In a 1995 survey of equipment dealers, 30% indicated that paying their salespersonnel a salary was their preferred method of compensation. Although nearly two decades old, I’m certain few dealers have transitioned away from this traditional and simplistic form of compensation.
While other types of salespersonnel compensation are based on some form of performance, salaried sales compensation is based on a unit of time; i.e., put in your time and you will be compensated. Productivity or performance is superfluous compared to the actual time that is logged. The salesperson will receive the same amount of money week in and week out whether or not sales were made or margins achieved.
By its very nature, a sales compensation system based on salary has an overriding tendency to attract insecure, non-risk-taking underachievers who prefer the security of a fixed income rather than a variable income predicated on their performance. For over 30 years, I have questioned why any dealer would employ a salesperson on such an archaic system. The answer speaks more to the dealer mindset than to the compensation philosophy.
The first type of dealer who prefers to pay his/her salespersonnel on the basis of salary is that individual who simply can’t stand the thought of a salesperson making $100,000, $200,000 or more a year.
Rather than reward on performance where both the salesperson and the dealership make more money, the dealer would simply rather pay them a lower fixed cost. This is more psychological or parsimonious than pecuniary, and is generally associated with dealers who simply “don’t get it.”
Another type of dealer who rewards his salespersonnel on the basis of salary is the traditionalist who is chained to the past. “My father or grandfather paid their salesmen a salary, and if it was good enough for them, it sure is good enough for me.” In these cases, status quo is the norm and change is verboten.
A third type of dealer who rewards his/her sales force on the basis of salary is the person who simply doesn’t trust the employees. Rather than hiring an overachieving, money-motivated, goal- oriented individual, and then providing them with the training to be successful, this type of dealer would rather establish every sale price, put the value on every used unit, estimate every internal cost and finally, oversee all of the necessary paperwork. Generally associated with a small volume, single-location dealership, this type of dealer will soon become extinct.
The primary advantage of a salaried sales compensation program is it simplifies the planning and budgeting process and smoothes out the monthly expenditures. Another advantage is that since the sales force is on a salary, they could be asked to undertake activities other than those specifically related to their job description. For example, they could be asked to collect receivables, go to the post office or take the dealer’s car in for service. While not generating sales or margins, they are nevertheless at the beck and call of the dealer.
Other advantages that could accrue to a dealership that insists on paying their sales force a salary could include lower vehicle expenses since salaried sales personnel will rarely leave the dealership; lower mobile phone expenses since they can use the dealership land line to give out quotes over the phone; and lower demonstration expenses since such expenses would be rare indeed.
On the other hand, the disadvantages of a salaried sales compensation system are multitudinous. First, such a sales compensation will never attract an overachiever. Overachievers want to be rewarded on their own individual performance and not on the whim of the dealer principal. Second, goal setting is a foreign concept both to the salesperson and to the dealer who rewards salespersonnel on the basis of salary. In fact, very few sales people who are compensated on the basis of salary could even tell you what their sales or margins were for any given period of time. Another disadvantage of a compensation system based on salary, unless the dealer exercises extremely tight controls, is an overabundance of overpriced used equipment since concern for turnover, like just about anything else, are of little importance or consequence.
Salaried sales compensation should be limited to inexperienced new hires and only for a limited time, say two years, until properly trained. Other than that, this system should never be used except by insecure, avaricious, distrustful autocrats who want to employ automatons rather than field marketers.