New Parts Manager Pay Plan Metrics for the Modern Parts Department Reality
Traditional Parts Manager Pay Plan are Not Working... Time for a New Approach
Creating an effective pay plan for Parts Managers in auto dealerships can be challenging due to the complexity of metrics and ratios that influence performance. Although it might seem straightforward to base pay plans on Gross Profit, this approach can lead to unintended negative consequences for dealership profitability and operational effectiveness.
Here’s a guide to crafting a fair and motivating pay plan for Parts Managers while avoiding common pitfalls.
Traditional Pay Plan Compensation Models Do Not Recognize Today’s Realities
Historically, compensation plans for Parts Managers have typically fallen into two categories:
Base Salary + Percentage of Department Gross Profit
Base Salary + Percentage of Department Net Profit
However, these traditional plans may no longer be effective due to significant changes in the Parts Department over the past decades.
Changes in Parts Department Operations Require a New Incentive Pay Plan
Consider OEM Stock Replenishment Programs:
Programs such as GM’s RIM, FCA’s ARO, and others now handle a large portion of inventory management, guaranteeing “no risk” returns on recommended parts.
Dealerships must meet certain thresholds (e.g., carrying 85% of recommended parts and maintaining a 90% purchase loyalty) to benefit from these programs.
Consider Supply Chain Issues:
Broken supply chains have increased backorders, raising Work In Process (WIP) by 20-30%.
Consider OEM Warranty Payment Formula Changes:
OEMs are often recovering costs of warranty repairs through reduced labor time guides, incentive programs, and return allowances.
These changes collectively have shifted some control away from Parts Managers, making old compensation models less effective.
So What do Parts Managers Actually Control:
Despite these changes, Parts Managers still control several critical areas:
Stock Replenishment: Managing fast-moving inventory beyond the OEM recommendations.
Special Order Control: Reducing obsolescence of special ordered parts.
Parts Pricing Strategies: Implementing matrix pricing to recover lost margins.
Wholesale Sales: Adjusting discounts to improve margins.
Potential Compensation Plan Factors
To better align Parts Manager compensation with their areas of control and dealership goals, consider these strategies:
Fixed Ops Commission Based on Net Profit of Service & Parts: Encourages holistic performance and discourages discounting at the expense of other departments.
Bonus Based on Special Order Control: Incentivizes managing and installing special ordered parts, sharing surcharges when uninstalled parts are returned.
Bonus Based on Keeping Obsolescence Under a Predetermined Percentage: Ties a portion of increased gross profit to an asset account to offset obsolescence losses.
Bonus Based on Customer Pay Labor Sales: Promotes interdepartmental cooperation and maximizes service sales.
Conclusion
When designing a pay plan for Parts Managers, focus on metrics they can genuinely influence.
Poorly designed pay plans can lead to dissatisfaction and broader management issues due to unintended consequences.
By aligning pay plans with controllable factors and dealership goals, you can create a motivating and fair compensation structure that enhances overall performance and profitability.
This Post was adapted from a much more detailed DealersEdge Guide - "Parts Inventory Management By The Numbers"
See Below for More Information about this Resource...
This Parts Operations Guide Provides You With a Deep Dive Into the Workings of Today’s Dealership Parts Department
This new DealersEdge Guide provides details centered on the numbers, reports and processes of a well-run parts department focused on providing the parts needed by your Service Department on a timely basis.