Previous Installment: Developing a Compensation Plan
In Part 1, Clement explains how to hire the proper parts employees and develop a compensation plan that encourages the employees to work together to not only sell parts, but also take care of all aspects of the parts program.
When it comes to bonus programs, regardless of the department, I am a big believer in simpler is better. If you have a program for any department that is complex and has lots of variables, then your people will tend to lose their interest in going after the bonus. The goal is to create a bonus that doesn’t divide the team, but brings them together to focus on increased sales, margins and customer satisfaction.
In the dealerships I consult with, I have a bonus program that works great, is simple to administer and easy to understand for the owner, manager, accounting and the parts people. It’s based upon just two variables and is paid out once per month, so the employees can see immediate results based upon their efforts. In addition, by implementing the monthly bonus system, accounting is not going crazy trying to keep up with a bonus every payday. The two variables are month-to-date sales over last years and the gross profit margin on those sales.
As you compare the monthly sales from one month last year to the same month this year, you are looking for growth. If, as an example, your parts department did $20,000 in parts sales for April of last year and your parts department did $30,000 in parts sales in April of this year, your dealership would have had a growth of $10,000 in new parts sales for the same period of time. Your bonus should be based on the new growth, not on the total amount. Keep in mind that I used the profits off of the $20,000 last year to pay the same bills I paid this year, so I can’t bonus off the total of $30,000 sales this year, just off of the difference.
I have found when creating bonuses that giving more money is better than giving less. A bonus of $25 or $30 extra in one month isn’t going to have an employee working harder to drive sales, yet paying them $100 or more — now you have their attention.
In this example, we generated an additional $10,000 in new sales and let’s say that your gross profit margin on those parts sales was 40%. The profit off the $10,000 represents $4,000.
The $4,000 is all new money to the dealership. You have already paid out the departmental expense using the first $20,000 that equaled what you sold for the same time the year before. So again, for the most part, the $4,000 will be represented as net profit to the dealership, not gross. I would encourage you to take 30% of the increased profit or in this case $1,200 and distribute it to the parts department at the end of the month that it was earned. Let’s say you have 2 parts people and a parts manager. If it were me, I would give the parts manager 50% of the money or $600 and divide the balance between the other two parts people so they walk away with a cool $300 each.
By pooling the money as a group instead of keeping track of individual sales, you eliminate the parts person who only wants to wait on people who are interested in buying parts and ignores the phones and anyone else they might see as a barrier to them making money. This way it doesn’t matter who made the sale, only that it was made and, the more that are made, the bigger the bonus for everyone.
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The second part of the bonus has to do with the average gross profit margin you would expect your department to maintain. In my example, I used 40% as an acceptable margin for the department. In real life, for an outdoor power equipment dealer, that would be a little low. I recommend you work to maintain a 48%-53% average gross profit margin on your OEM parts. So, instead of 40% you might want to make your minimum acceptable margin at 45% and higher.
The impact this has on the bonus is twofold. First, if the parts sales have increased but the margin falls below the 45%, there is no bonus available to the team. As I had mentioned earlier, I can grow your parts business if you don’t care what the margin is on the parts I sell. To have an increase of $10,000 but to lose 8% on the total of $30,000 doesn’t do either you or your dealership any good.
Second, if the parts department maintains a margin that is 45% or greater, their bonus becomes bigger. A bonus on $10,000 at 45% would be $1,350. At 53%, the bonus would be worth $1,590 for an increase payout to the department of $240. Not bad for holding margins, cross selling and upselling those customers coming to the parts counter.
Building a solid compensation program for your parts department will pay off with both improved profits and delighted customers who come back over and over again.
It take some time to build and manage an effective program, but your job as an owner or a manager is to hire the right people, keep them happy so they will keep your customers happy and grow your profits. The time you invest in your parts department will pay off in big dividends.
In a world where everything looks the same, creating a unique experience for your customers will set you apart from the crowd and add valuable dollars to your bottom line.