Instead of receiving a salary, hourly wage or fixed commission, employees in a pay-for-performance system (PFPS) are compensated according to their measured performance.

A well-structured PFPS enhances all aspects of employee performance to support the dealership’s business, strategic and financial objectives. It’s not uncommon for chronically unprofitable dealerships to go cash-flow positive within a few weeks of implementing a well structured PFPS.

Back to school

In many ways, a PFPS resembles school grading system: either you produce the right answers and get good grades, or you don’t. The system works because the grades represent an objective measurement of your work - and in the business world, better grades translate to better pay.
 
Poor performers soon fall by the wayside, clearing the way for better performers to come on board and further enhance the performance of the organization.

With a properly structured PFPS, the performance of every employee, manager and department under the plan is tracked and measured objectively on a daily basis. Each person is “graded” on three to six well-defined metrics (the “subjects”) that represent the key responsibilities within his or her job function.  Each metric in the set provides a piece of total compensation that can vary depending on the “grades” received in each metric.

For example, an “A” grade in Metric 1 might be worth $2 per hour, while a “B” pays $1, a “C” pays 50 cents, a “D” pays 10 cents, and an “F” earns nothing. For Metric 2, an “A” might be worth 10 percent of gross profit per vehicle, a B pays 5 percent, and so on.

The earnings for each metric are tallied to provide compensation commensurate with the individual's performance as reflected in the “grades” achieved.

Rewarding "straight A" performance
 
To illustrate, an automotive technician might be measured in three key areas: CSI, paperwork compliance, and service up-selling. Each metric might be worth one-third of his total compensation. His hourly wage could range $16 (for low grades in all three metrics) to $30 (for “straight A” performance).  As long as the measurements are perceived as fair and objective, the technician has ample motivation (up to $14/hour in additional pay) to achieve higher grades in all metrics.

An extra $14/hour may seem a bit steep, but keep in mind that a well-designed PFPS will pay out only as much as deemed necessary to maximize profitability for the mechanical department - an amount based on the analysis performed during the PFPS development phase.

The range of compensation, as well as the different metrics for each employee group, must be established through a comprehensive analysis of dealership needs, national and internal benchmarks, and the function in question.  Only then can a PFPS achieve its goal of motivating a workforce to become consistently professional and highly productive.