Pay Plans Shift to Reward Systems

Pay plans don’t manage people; managers manage people. Don’t think a pay plan will do the work for you.

David Linton

January 27, 2012

3 Min Read
David Linton
David Linton.

Many service-department compensation plans are designed with the specific intent of managing people.

But the old axiom is true: Pay plans don’t manage people; managers manage people. Don’t think a pay plan will do the work for you.

“We are in a revolution in reward systems,” says Rob Heneman, who teaches human resources at Ohio State University. “It's not something that’s going to go away.”

The role of pay is shifting from mere compensation to ways to motivate staffers to achieve specific goals. Pay plans alone do not increase sales or customer satisfaction, although they can focus on such areas and play a role.

I advocate “ways” vs. “the way.” There are many different ways to design compensation plans. One of them is objective-based, a derivative of the 40/40/20, 40/30/30 and 40/20/20/20 pay plans. These have been used for many years with great success. 

For dealership service advisors, elements can include salary as well as bonuses for flat-rate hours performed, flat-rate hours sold and results-based areas management deems as important, such as customer satisfaction.

In some situations, the objective-based compensation plan doesn’t satisfy a direct cause-and-effect relationship between sales and compensation. This is usually the case with a strong service advisor and one or more average service advisors.

The strong advisor can sell a higher proportion of the flat-rate hours but receive the same or equal percentage of the total wages. It is important that a pay plan not subsidize average or poor performers at the expense of strong ones.

Therefore, the design logic for the objective-based compensation plan centers on the following:

  • Fairness. It is unfair for high producers to subsidize low producers?

  • Good work. Quality counts.

  • Performance. Advisors are paid on the sale of flat-rate hours, so more of those equals more pay and vice versa.

  • Objectives. Note: If the objectives are unrealistically high, most service advisors won’t reach them.

  • Budgets. Keep compensation expenses within 100% and 110% of objectives.

The objective is based on the number of days, clock hours available per day, available technicians, desired level of production and percentage of calendar utilization. 

This is a fairly simple pay plan to understand. A specific dollar amount is attached to the sale of a flat-rate hour. If the objective is met or exceeded, the dollar amount is increased by the percentage of increase over objective.  If the objective is missed, pay is decreased by the percentage of underachievement.

The only area where lack of understanding can occur is in establishment of the objective. It is important that the service advisor knows the historical trend of past performance and how the objective was established.

It only takes a little pencil work to determine if the objective is fair or not. The service advisor must understand all of the elements that went into the calculation of the objective.

A lack of understanding of any of the elements may cause the service advisor to feel the objectives are set in an arbitrary fashion and lack credibility.

High performers quickly see the benefits of increased production and the corresponding increase in income. Low performers feel the effects of poor performance on their income. Objective-based compensation rewards the producers.

Every pay plan must have a cause-and-effect relationship. In this case, the amount of bonus earnings provides this, as it is based directly on performance and makes up 60% of the service advisor’s income. 

However, poor performance can be an indicator of several problems that might not stem from poor selling skills.

For example, besides low production, other factors in poor performance can be lack of training, tools and equipment or lower-than-projected calendar utilization. All of these factors must be examined and managed.

Calculating the pay plan is easy. With simple flagging and accounting procedures, the service advisor has the ability to track flat-rate hours in regard to the objective and rate of achievement. 

Management must provide the necessary information. Service advisors should know where they stand on a daily, weekly and monthly basis.

(David Linton heads Applied Transportation Concepts. (ATcon), a fixed-operations training firm, and is co-owner of OnCourse, a training development firm. He is at 1-800-692-2719 and [email protected]).

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