What is the ideal car salesman pay plan?
The pay plan is the most important guiding document of a sales organization. How you pay your salespeople dictates how they will act. If you focus the pay plan around profit, your salespeople will focus on profit. If you concentrate the pay plan on volume, they will focus on selling as many units as possible.
There is no one “perfect” car salesman pay plan. That said, there are some guiding principles that all car salesman pay plans should adhere to (and some potholes to avoid).
In today’s article, I’ll be reviewing the various facets of the car salesman pay plan, with a focus on best practices. Make sure that you always keep in mind what your salespeople think about their commission.
Crafting the Perfect Car Salesman Pay Plan: Figuring out a Target
Just like any real estate deal or business plan, the perfect car salesman pay plan starts by working the numbers backward. You need to build a car salesman pay plan that enables your top performers to make more money than they could anywhere else, while also allowing your average salespeople to make an area-adjusted average income.
Your car salespeople sacrifice to work their job. Those with the skills you seek are valuable assets to your company that need to be compensated accordingly. Your top performers could sell at any dealership, and often, in other industries as well. Your salespeople are probably working long hours and weekends away from their families, in a position with plenty of stress.
In the San Francisco Bay Area, the competition that you face as an employer is mostly from technology companies. These technology companies often have better working conditions and hours than your dealership. To capture your salespeople, you need to enable them to make more money at your dealership than they could if they switched over to technology sales (at least for the first few years). Making a strong income quickly is one of the biggest draws of the car sales career.
Market Research (Other Business Types)
As a sales manager, the first thing you should do when researching your car salespeople’s new potential pay plan should be to find out the optimal income level that you want the top 20% to be able to achieve.
The optimal income level comes down to what is available in your local market for your employees. To figure this out, I recommend speaking to real people rather than relying on aggregator websites such as Glassdoor.
In my area, new salespeople at the dealership could qualify for entry-level “Sales Development Representative” roles at local technology companies. These roles pay between $55k to $75k after bonus in my area, with full health care benefits and beautiful offices. I can find this out quickly by reaching out to a few of my long term customers and friends that work in those businesses.
Therefore, to attract talent to work at the car dealership, I need to have my top 20% of staff be able to make between $80k and $90k in their first year. This extra money will ensure that the salespeople will have to take a pay cut to change industries. This number ($80k, for example) will be what I use to work backward from to build a pay plan.
Market Research (Other Dealerships)
Many car dealerships in my area are plagued with expensive turn-over rates. Therefore I don’t rely on comparisons to their pay plans since what they are doing isn’t working.
That said, if there is a superstar dealership in your area, I always recommend figuring out what they offer. The experience of your salespeople is more than pay, but it is a critical piece of the puzzle.
Crafting the Perfect Car Salesman Pay Plan: Working Backwards
Now that we have our “goal” income ($80k), we can begin to work backward to design the car salesman pay plan.
Our perfect car salesman pay will be competitive enough to keep our employees happy while aligning their activities with our business goals.
Let’s start with some example business goals:
- Max Volume: You want your dealership to sell as many cars as possible. Gross profit is less important. This strategy is generally based around having a profitable service center and an aggressive manufacturer stair-step program.
- Max Profit: You want your dealership to make money where it can, and as much as possible. Gross profit per car is incredibly important to your dealer. This strategy is generally based around having less service retention and a smaller volume of vehicles on the lot.
- Mixed: You want units, you want gross profit, you want it all. You need to have balance.
Max Volume Dealership Example
Let’s say you work at a dealership that is focused on maximizing the volume of cars sold. You have plenty of inventory in stock, and you need to move it.
When building a car salesman pay plan for a dealership like this, you are going to put the focus on unit bonuses. You don’t want your salespeople to stress on the front end profit of deals. You want your salespeople to bring you every transaction, regardless of the offer.
Let’s work backward. Our top-20% salesperson needs to make $80k/year for our store to be competitive. Therefore, they need to make $6600/m when performing at their level. At the current time, this type of salesperson sells 12 cars per month. In California, I need to pay $1000/m as basic income, so I need to spread $5600 over those 12 cars. A simple way to build this pay plan would be to structure it as such:
If you sell 1-11 vehicles, you make $400/car (plus $1000 base pay)
If you sell 12+ vehicles, you earn $475/car (plus $1000 base pay)
Now my salespeople that sell ten cars a month will make $5000 per month and my salespeople that sell 12 vehicles per month (the top-20% salespeople) will earn $6500. This significant jump between 10 and 12 cars should encourage salespeople to push to at least sell 12 cars.
Max Profit Dealership Example
Let’s take the exact opposite strategy, max profit. The logic is simple with this strategy. You need to align your salespeople with making as much profit as possible. The easiest way to do this is to focus their pay plan around a high percentage of profit offered.
After discounts in your market, your average front end profit is $900 per car. Your goal with this strategy will be to beat this number. A reasonable goal might be $1100 profit per car. If your average salesperson sells 12 cars a month here is the math:
$1100 goal profit per car * 12 cars sold on average = $13,200 profit
You will need to give your salespeople a reasonable minimum commission per car to keep morale high, so let’s say you pay a $300 mini per car sold:
$300 minimum commission * 12 cars sold on average: $3,600 income on 12 cars sold minimum
With a $300 minimum commission, your 12 car salesperson is making $3,600. You need to get that number to $6600 per month based around a target profit of $1100 per car. Out of the $13,200 profit, you need to pay $3000.
$3000 additional commission needed / $13,200 profit goal = .22 -> 22%
Done, here is our pay plan. We pay $1000 for showing up and $300 mini per car sold. On top of the mini, we pay the salesperson 22% of the gross front end profit:
$300 Mini Per Car * 12 Cars = $3600
Plus 22% of $13,200= ~$3000
Total Income: $6600 per month
The Reality of The Situation
The reality of the situation is this: you already have a car salesman pay plan in place at your dealership that your salespeople are used to. All salespeople fear their pay plan changing, which means that you will likely not be able to institute a completely new pay plan without considerable upset.
The purpose of this article is to give you instead of an idea of how you might go about tweaking your store’s current pay plan to align better with your goals.