Driving your dealership through pay-for-performance
Forrest Flinn, Columnist
August 9, 2013
Filed under Columns
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More and more small- to mid-sized powersports dealerships are beginning to tie compensation directly to employee performance to drive incredible dealership results.
Originally believed to be only for the sales department, pay-for-performance is proving to be effective at almost all levels and in all functions of the modern day powersports dealership. Though gaining acceptance from both managers and front line employees, most dealerships lack the know-how to make it a reality. This article offers an easy-to-understand roadmap to apply pay-for-performance as a strategy within your dealership and will provide valuable and real-world insight into building a successful pay-for-performance culture within your dealership that can transform the profitability of your store.
Building a pay-for-performance culture within your dealership seems like an abstract vision for some dealerships; however, it’s considered a top tool by companies in other industries. In the powersports industry, we feel that we are a unique bunch where other industries’ practices will not fit or apply. There is a good reason that pay-for-performance structures work in other industries … because it works. A good pay-for-performance culture has the ability to unlock employee performance potential, keep your “superstars” happy and ultimately drive a healthier dealership bottom line.
Pay-for-performance, often referred to as commissioned-based pay, is a key vehicle to align employees’ goals with the dealership’s objectives because it links rewards to performance, which is most critical to your dealership. Communicating and tracking each employee’s progress against the dealership’s objectives is imperative and delivers a host of positive results:
• Employees are more efficient, productive and focused on achieving key dealership goals.
• Shared responsibility between the employee and the dealership by sharing the company goals with others.
• Managers can stay in touch with employees’ progress throughout the year and offer immediate coaching to keep employee performance on track.
Most employees become more engaged and motived by understanding how their daily activities help drive overall dealership health; this unquestionably results in both individual and company-wide success.
Another overreaching benefit to pay-for-performance is developing a culture in which employees are energized to perform at maximum levels. Jack Welch, former CEO of GE and a leading expert on driving performance, believed the ultimate goal of managing is not getting an employee to perform as expected, but to have them willingly go beyond the call of duty because they want to.
A pay-for-performance system is a key element in getting employees to excel at maximum (and beyond) levels. How? By combining clear direction, quality feedback and tangible rewards, workers also receive recognition — a key component to job satisfaction and employee dedication. This builds a more satisfying relationship where employees are inspired by knowing management truly values their efforts.
It’s no secret that the key to retaining the best and brightest employees is recognizing and compensating top performers. According to Giga Information Group, retention can be improved by up to 27 percent with meliorating management, or pay for performance.
In a well-planned pay-for-performance system, managers have easy access to all the information they need to reward individuals for actual performance. This allows them to track employees’ progress against performance goals and reward efforts according to defined expectations. Employees are, in essence, empowered to be in control of their financial situation, which many HR experts site as key to maintaining the tenure of top-performers. In addition, overcompensation of underperformers is avoided, a mistake that frequently leads to “superstar” workers leaving with complains of unfair treatment.
A pay-for-performance culture can help your company save money in a way you may not think of — avoiding overcompensation. Companies can waste literally thousands of dollars a year by rewarding individuals whose performance doesn’t help achieve key dealership objectives. The ongoing accountability developed in a pay-for-performance culture helps avoid this pitfall.
Making it work
It’s important to realize that there is no one-size-fits-all approach to developing a pay-for-performance culture in dealerships. Many consultants in our industry give us cookie cutters for pay plans and say that it will work in all dealerships. This is untrue, and implementation of such plans can cost you thousands of dollars in lost employee morale and payroll overpayment. Implementation of such cookie-cutter plans can even make you lose valuable employees. To be successful, you have to think custom pay plans and tailor a system to your unique dealership needs and existing management processes.
Things to keep in mind:
• Are the tasks that people are working on driving the business? How can you tell?
• Are your managers engaged with your employees throughout the year to make sure they execute their departmental objectives?
• Are individuals executing against what is expected of them at your dealership?
• Are you objectively ensuring that bonuses, raises and promotions are given to those high-performing employees that you can’t afford to lose?
Pay-for-performance is not a one-way street, where your managers set up a system and employees simply follow suit; there are psychological and emotional realities that have to be in place. In fact, it’s common for companies to ask the right questions and build the right systems without thinking about the human side of pay-for-performance. For a successful performance-driven culture to be adopted, it is important to gauge the attitude of your employees. In general, employees have to desire higher personal pay, have the skills and capabilities to improve performance and trust the dealership to administer the plan fairly and pay them if they improve performance.
Think of this as employee “buy-off” into a pay-for-performance system — a factor regarded as mandatory by companies that have successfully implemented pay-for-performance.
Three key steps
Pay-for-performance is regarded by many as an art that requires discipline and integration of three key areas of human resources: compensation, goal alignment and performance management.
Step 1: Compensation planning. The first step to implementing a true pay-for-performance system is developing an overall compensation plan for the company. There are several approaches that can be used to create a compensation plan. Employees can be rewarded by salary, bonuses, 401K contributions, or through gifts.
Most successful companies have based their pay-for-performance compensation plan on a structured incentive scenario. A structured compensation plan is one in which employees understand ahead of time the precise relationship between performance and the incentive reward.
A survey of dealerships across the country reveals one common approach — goal-driven incentive plans. These require constant budgeting and forecasting and are tied to achievement of a specific time-based goals. For example, if you sell 20 units this month, your compensation will be this.
The key is to implement compensation policies that are fair, consistently followed and subject to review and oversight.
Step 2: Goal alignment. After the compensation strategy is determined, dealership leadership must establish organizational goals through a clear mission. Many dealerships suffer from not having any method of communicating goals set by dealer principles for individual employees. In fact, nearly 95 percent of dealership employees are unaware of their dealership’s top objectives.
The area of goal alignment has been one of the most significant advances in the field of human resources. Establishing a formal review process for creating relevant goals for each employee and mapping those back to dealership objectives is crucial for establishing a true pay-for-performance culture. When department managers and employees see the goal plan and understand that their individual goals fit into the company’s business objectives, then a pay-for-performance system begins to thrive and directly contribute to bottom-line results. For the dealership “superstars” in your business, this means making sure goals are aligned with activity within their control, not solely based on functions they cannot directly influence.
Keep in mind that your success in aligning employee and dealership goals requires an open dialogue with departmental management. This is the only way to ensure dealership strategy is woven into all human resource efforts.
Step 3: Performance management. The final step in developing a pay-for-performance system is contingent on the ability to continuously measure and manage employee performance in a quantifiable way. Many dealerships fail to take this last step and end up with an arbitrary or subjective review process.
Performance reviews are critical to maintain a level of performance management that will support a thriving pay-for-performance culture. However, reviews have to be regarded as more than just an “annual event.” This can be achieved by formalizing a process of performance reviews on a monthly or quarterly basis. This will inevitably create a better dialogue between employees and their respective departmental managers.
Too often performance reviews are seen as a tedious requirement, but ironically, they are the primary basis for compensation and overall career building. By evaluating individual goals that tie to higher level dealership goals, performance reviews are a pillar of performance management.
By integrating these elements into your human resource processes, your dealership can establish a true pay-for-performance culture. The result is a more energized and engaged workforce that clearly understands how their contributions affect overall dealership success, and knows they’re being compensated fairly for their efforts. The overall dealership results can be enormous, including retention of top talent, higher levels of performance throughout your dealership and greater revenue and profits.
Forrest Flinn, PHR, is a managing partner of Powersports Management Concepts, a provider of outsourced accounting and human resources solutions. He is a former DMS trainer and multi-line dealership general manager.