May 2009 - Feature
Pay-Plan Breakdown
By Joe Bartolone
How F&I managers are compensated has been an ongoing
debate. Dealers often view a pay plan as a reflection of the goals they want to
achieve. F&I managers, however, argue that sometimes these goals can lead a
dealership down the road of noncompliance. Regardless of who’s right, a pay
plan is an F&I manager’s job description.
As a compliance auditor and consultant, my expertise is not
in designing pay plans. However, by following an audit I can usually tell if a
dealership has a well-balanced pay plan or whether the pay plan is driving
undesired behaviors and results. That’s why it’s important that dealers review
the performance objectives of a F&I pay plan to determine if they’re
achieving the profit, administrative, compliance and behavior goals for which
they hope. Now let’s take a look at eight commonly used pay-plan objectives to
see how they impact performance.
Objective 1: High CSI Ratings
F&I Manager’s Interpretation: I need to get the customer
through the F&I process as quickly as possible.
Auditor’s Take: Unless a customer has been stuck in a marathon
close in the sales department, he or she is usually open to a professional
presentation in the F&I department. They appreciate your attention to
detail and when you review the terms they agreed to in sales. They like it when
you take the time to understand their needs and offer products that satisfy
those needs. They also take note when you offer to assist them after the
delivery.
Compliance Alerts:
• A high percentage of recontracting, which is commonly
referred to as yo-yo transactions.
• No initials at the top of the menu indicating agreed-to
terms and disclosure of the base payment.
• Based on the time stamp, short interval between first and
final menu.
• No acknowledgement page on menu to confirm accepted and
declined products.
• Near-term payoffs and product cancellations.
• Low customer satisfaction index (CSI) scores.
Objective 2: High Product Penetration
F&I Manager’s Interpretation: No matter what, every
customer is going to buy something.
Auditor’s Take: Some pay plans set a baseline for product
penetration and pay a bonus if the product penetration exceeds a higher level.
An example would be requiring an average of one product per retail deal, with a
bonus paid if the average is 1.4 products per retail.
Compliance Alerts:
• Product Bundling: This occurs when two or more products
are sold and disclosed as one product on the buyer’s order, retail installment
sales contract (RISC) and product enrollment form (typically service and
maintenance). The customer does not see the products separated during the deal
recap. This is typically done by reducing the price of the product that was
disclosed, and allocating a sum of money to a second or third product.
• Product Stuffing: This practice is different from bundling
in that the allocation to pay for the undisclosed product comes from gross, not
from a second product.
• Trading Rate for Product: Lowering a customer’s agreed-to
annual percentage rate to facilitate a product sale can be viewed as a
deceptive practice in the eyes of attorneys general.
• Payment Packing: This occurs when undisclosed and
uninvited F&I products are added to payment quotes in the sales department.
It is inappropriate to quote payments on a short undisclosed term in sales,
then rolling the payment out in F&I to include products while the payments
remain the same. It is also inappropriate to quote payments in sales using an
artificially high and undisclosed interest rate, and then lowering the rate in
F&I to include products while keeping the payments the same. Typical signs
of payment packing are higher product penetration than market averages, unfiled
menus, or poorly executed menus.
Objective 3: Mixed Product Penetration
F&I Manager’s Interpretation: Sell products in packages
regardless of the customer’s needs.
Auditor’s Take: Some F&I managers will sell product
packages instead of individual products by offering a discount, but only if the
customer buys the package.
Compliance Alerts:
• Recap sheets will show unusually low profit margins on one
or more products.
• GAP sold to customers with a loan-to-value ratio of less
than 70 percent.
• A clear sign of this type of pay plan are higher product
penetrations than market averages.
Objective 4: High Profit Per Vehicle Average
F&I Manager’s Interpretation: Sell at whatever price the
market will bear.
Auditor’s Take: Most play plans are based on one simple
concept — the more profit the manager generates per deal provides for a higher
percentage of the profit. While profit is not a bad thing, it may lead to
undesired results.
Compliance Alerts:
• Price gouging.
• Excessive Finance Reserve: Although only regulated in two
states, most finance sources have capped finance reserve at 250 to 300 basis
points, but finance reserve should still be monitored.