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Performance Based Compensation
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Fixed Operations Pay Plans
There are several components to an effective fixed operation pay plan for service advisors and managers, shop foremen, systems administrators and other key personnel.
The first component to an effective fixed operation pay plan is determining if the department and or service advisor is producing realistic sales or gross profit performance.The next step is to determine if the department is attaining benchmark performance standards for customer pay labor and part sales sales, gross profit retention, fixed coverage, customer satisfaction and net profit. If so, congratulations! If not, it is time to generate a departmental forecast.
While generating a forecast is a routine task for my company, it is an area where dealers typically need assistance. An effective departmental forecast involves more than just taking previous year’s numbers and assigning an increase. Training personnel on how to attain the forecast would be advised as well since pay plan changes are a very sensitive issue for employees.
The key area that service managers can control is customer pay labor and part sales per repair order. This can be increased by both sales performance, strategic service pricing, effective labor rate and menu packaging strategies. Utilizing compliant factory service menus is highly recommended for obvious reasons.
Another key area is customer pay labor gross profit retention. Increased selling performance by the service advisor and pricing strategies will increase  labor gross profit retention. While this is the most common area of financial growth and opportunity for dealers, it is one of the top five problem areas we find in the fixed operations.
Unapplied labor for hourly technicians will reduce service department gross profit as well. Tracking unapplied labor and selling into that inventory can reduce unapplied labor and increase departmental gross profits.  This is an area and issue that is more commonplace with Toyota, Acura and dealers utilizing express service group or teams of hourly compensated techs.
Knowing what the proper expense to gross profit percentage is for the compensation of the position being addressed is critical so the department can generate a realistic return on investment. Once you know the average monthly gross profit generated by the service advisor and proper percentage of expense, you can determine the amount of compensation for the employee.
Sheriff-5 Star recommends a draw against commission. You should also check your state laws as well regarding compensation to ensure compliance. If a salary is required or elected, keep the salary component of the compensation as little as possible since salary typically reduces the drive or incentive of the employee. Service advisor pay plans should be based on individual performance. A very small percent of compensation for a total of the entire department can be incorporated as well if needed to encourage teamwork among all advisors.
On the service advisor pay plan, you can compensate from either labor and part sales or gross profit. Our preference is to compensate from all categories of labor and part sales that the service advisor handles. The forecast indicates the gross profit associated with the labor and part sales so you can still pay within benchmark of service advisor expense to gross profit utilizing sales as the component to be compensated from. The benchmark is around 13% service advisor compensation expense to labor gross profit.
In addition to the compensating from all categories of labor and part sales, monthly incentives for key performance measures should also include:
A tiered monthly bonus on customer labor sales per transaction.
Menu sales penetration     (factory recommended interval services)
Menu penetration bonus
Dealer recommended maintenances (alignments, wheel balances, etc..) Assign dollar amount per item sold
Customer Satisfaction Scores.  Determine what scoring criteria you want to compensate from ensuring that the employee has control over the criteria selected. This could be monthly or quarterly bonus. How much is CSI valued by your dealership?
A service management pay plan would be calculated as a percent of total labor gross profit minus some controllable expenses that you select from the financial statement. Service management compensation benchmarks is typically 5-8% compensation expense to labor gross profit.
In addition, monthly bonus on customer satisfaction scores and any other key areas you may determine to be important.
Need help in service department forecasting, fixed operation pay plans, sales performance benchmarks, customer satisfaction, service advisor training, service menu development, Let us at Sheriff-5 Star Automotive Operating Systems help you with a FREE Assessment.

If you need help increasing service department profits, service forecasting, service advisor training, service menus, service personnel pay plans, customer satisfaction processes or work distribution systems please call 401-450-2549 or fill the request form.

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