Sales Department Payroll Percentage
Posted September 6, 2011 by adminYour dealership’s total sales aren’t always within your control. However, you can manage many of your expenses, and controlling expenses in today’s market is crucial. Strong sales have a way of camouflaging elevated expenses, but when sales slow, inflated expenses must be closely examined.
Dealership expenses usually fall into two main categories: Fixed Expenses and Variable Expenses. Fixed Expenses include Rent, Phone, Power, Internet, etc. and are generally very difficult to reduce. The good news is that with a strong attention to detail, it’s realistic to decrease your Variable Expenses enough to make a significant impact on your bottom line. One of the biggest Variable Expenses that Dealer Principals can focus on is payroll. For example, let’s focus on Sales Department Payroll Percentage.
Sales Department Payroll Percentage is usually measured by taking the total amount of Sales Department payroll and dividing it by the Sales Department’s total gross profit. Sales Department payroll typically includes a dealership’s Salespeople, Floor Managers, Sales Managers and any other person that’s exclusively dedicated to the Sales Department, and it usually does not include your Finance Manager. On a side note, many dealerships compensate their Sales Manager on F&I Sales and this portion should not be included in Sales Department payroll expenses.
As an example, let’s say that a dealership sells 100 units in a month at $1,000 front-end gross profit per unit sold, which comes to a total of $100,000 in gross profit. If this dealership’s total payroll expenses for the Sales Department was $40,000 for that month, their Payroll Percentage would be 40%. In other words, 40% of the Sales Department’s gross profit was utilized for payroll. The benchmark for Sales Department Payroll Percentage is 22% of gross profit, which is a savings of $18,000 per month based on the numbers above. That’s a total savings of $216,000 in one-year just by properly managing your Sales Department’s Payroll Percentage.
So, now the question is how do I distribute the budgeted amount of payroll and get a maximum return on that investment. This is determined by well thought out pay plans based on your dealership’s data. Pay plans vary widely depending upon region. For instance, a southern California dealer can more easily have a commission-only pay plan, but a dealer in Massachusetts will typically have to utilize a salary plus commission pay plan. With a salary plus commission pay plan, it is recommended that the salary not exceed 50% of total pay. A salary that’s equal to one-third of anticipated earnings is ideal.
One of the greatest ways to modify someone’s behavior is to modify their pay; this is the purpose of commission-based pay plans. You can design pay plans to move aging inventory, complete required dealership training, or even reward seniority. One dealership actually sets aside $10 for each unit a Salesperson sells, and pays it on their date-of-hire each year. This promotes increased salesperson retention. Considering that many Salespeople don’t even make it to the one-year mark, this may be a great idea for your dealership.
A well engineered pay plan will reward top performers, and weed out under achievers. Whatever pay plan you choose, make sure it isn’t over-engineered. It can be counter-productive if it’s too confusing, or if it takes management too much time to compute each pay period.
For some dealerships, that savings of $216,000 in one-year by properly managing their Sales Department’s Payroll Percentage could be the difference in being $100,000 in the red, or $100,000 in the black for 2008!
