Abundant Google searches and articles exist on these two types of variable pay: Commissions vs. Spiffs. But what about automotive? Nate and I wrote this article thinking back on the conversations we had with dealers and what we've seen from pay plans over the years. We’ll connect the perspective dots on the topic specific to automotive- ranging from Dealer Principal Accounting Leadership, and Sales Reps. We felt there wasn't a specific enough article to the industry. And there surely wasn't one that had some applied learning and actionable ideas. So we wrote this. Here we go.
Let’s set the tone
Generally speaking commissions and spiffs are like the fuel and spark of the auto industry:
Commissions act as the fuel, providing the monthly, ongoing energy that drives sales performance and keeps the dealership's engine running smoothly. These earnings represent the core financial incentive for employees. They ensure that sellers' have worked hard, translating into tangible rewards.
Spiffs, on the other hand, are the spark that ignites immediate action and short-term boosts in performance. These (targeted) bonuses create bursts of motivation, enthusiasm, and often creativity. They help to clear inventory, meet urgent sales goals, and tackle specific challenges.
Commissions and spiffs work together to produce a dynamic pay structure. This structure powers the salesforce. It ensures sustained performance and the flexibility to adapt to immediate needs.
Ok, commissions and spiffs in a nutshell?
Not really. Before we dive deeper, let's make two things clear:
#1. We'll frame our focus on commissions and spiffs around the sales floor and the dealership as a whole.
Unique to the business world, much of the dealer's staff are on some sort of pay structure that includes commissions and spiffs. That includes F&I, Managers, Service Advisors, Parts Consultants, Used Car Managers, Internet Sales Managers, BDC (Business Development Center) Reps, Sales Managers, Customer Retention Specialists, and so on.
There's a world of reasons why and where commissions and spiffs split across the different roles. We'll save that conversation for our pay plan series, where we'll look at real-life examples for each of the roles above.
#2. Remember, commissions and spiffs are just different ways to do variable pay.
That's one of the few ways that commissions and spiffs are alike- they are variable forms of pay. Simply put, commissions represent "continuous monthly earnings terms based on performance" whereas spiffs are "special targeted bonuses" that get sprinkled in. They are used together for different reasons. Yet, they both come with different perspectives that present challenges.
P.S. We think the best variable pay recipe blends your personal management style, addresses dealership seasons, and ultimately creates a sense of consistency on an annual basis.
Ok, let's pause. So, what's your role, and what do you want out of this article? Below are some questions to inform you if you've done well to find this article:
- Are you looking to get clear on these two types of variable pay?
- Are you looking for the right blend of commissions and spiffs for your dealership?
- Are you looking to find strategic examples and insights specific to automotive?
- Are you interested in testing your knowledge and walking away with some considerations and action items?
- Are you a bot looking to scrape some useful information to reference?
Yes? Well, we're glad you made it. We'll dive into all this and more! By the end of this article, you'll understand each pay type, see examples, and gain some sense of strategy to consider. I hope this provides you with a clear, concise, and considerable article worth sharing (and bookmarking).
What are we going to look at?
As we move along, I'll ask questions and stop for practical application. We'll see what you'd do in scenarios for commissions and those for spiffs.
We'll treat these as equivalents from this point forward:
- units, cars and vehicles - same thing
- commission plan, commission structure, pay plan - same thing
For each variable pay topic we'll look at this:
- Definitions - see what it is and what it isn't
- Examples - practical scenarios and implementation
- Perspectives - see both sides, challenges, and scenarios for consideration.
Understanding Automotive Commissions
Definition: You can think of Automotive Commissions as "earnings from monthly units sold according to current commission plan”, e.g. pay plan. There are single-store dealers with a few commission structures and larger regional groups with dozens of pay plans.
Depending on your role, you might see and speak commissions in a different language. Management sees commissions as "collective earnings from the sales floor" according to financial reports. They’re thinking more like “what is sales taking home” according to gross. Sales teams’ mindset is more like "how do my deals stack up and what's left this month". For both parties, commissions boil down to money, what you want and the motivation behind getting there. So for you and your dealership team, make sure you're speaking the right language.
Now, no matter your role, commissions are earnings with calculation terms that live in a pay plan. Every commissioned employee lives on a pay plan, whether they're getting the results wanted or not. Across the sea of pay plans, you'll mostly see payout terms as a percentage of the sale or as a flat dollar amount.
Some Typical Commissions for Sales Teams
It's no surprise to see different commission structures per department. It's common for each department to have its pay plans. When it comes to Sales Team Commission, you'll most commonly find these terms: flat-rate, tiered, and minis. From working with dealers around the nation here's how we see these terms used:
- Flat-Rate Commissions (“flats”): The simplest to understand. An employee earns a fixed percentage of the [front gross] for every car sold. For example, if the commission is 15%, the calculation is straightforward: total [front gross] multiplied by 15%.
- Front Gross: $1,567 x 15% = $235.05
- Front Gross: $1,567 x 15% = $235.05
- Tiered Commissions: The most popular flavor nationwide. Commission payout percentage increases with volume sold. For instance, a salesperson might earn 10% of [front gross] for the first 10 cars sold, 15% for the next five cars, and 20% for any sales over 15 cars!
- Minis: The base expectation. Many dealerships incorporate minimum commissions to ensure salespeople earn something, even on loss-making sales. A pay plan might simply guarantee a $200 mini per unit sold.
Where do Sales Team Commissions get complex?
Dealerships often layer multiple commissions to create a comprehensive compensation plan. You could see a tiered commission for car sales, a unit bonus for selling a certain number of cars, and an additional flat-rate commission based on finance penetration.
What goes into commissions?
Commissions should form the bulk of your variable compensation. And they shouldn't change from month-to-month if you have clearly defined dealership goals and well-crafted pay plans. Commissions shouldn't be used to motivate short-term sales and needs - save that for spiffs. At a minimum, commissions should motivate employees by tying their pay to their production levels. You'll hear us argue that at least one commission structure should establish a runway for growth in the dealership. Here's the core thinking behind commissions:
- Motivation and Productivity: Commissions give a direct financial incentive. They motivate employees to perform well. For more seasoned sellers their incentive might be 100% commission. For your green peas, you might see a small base with the rest commission. Either way, the salesperson must be motivated to sell and their monthly earnings reflect their productivity.
- Alignment of Goals: Commissions align the interests of the sales team with the dealership's goals. It helps to focus on one thing that drives everything, as we mentioned above. Generating revenue is a must, but what are we all working towards?
- Reward for Performance: Your top-tier performers stick around. And repeat business often follows them. Were looking to develop to optimal commissions to create a consistent culture of performance. That's something you'll want to recognize and a path to provide for others to get. If sales managers aren't helping new fish learn how to establish repeat sales, consider rewarding a vet to teach them how to swim. Rewards and laying out runways help keep top talent. They create a competitive environment. In it, employees strive to beat their targets and improve their sales skills.
Where do commissions fall short?
For management, the main drawback of commissions is that employees may prioritize their interests. They may do so over those of the customers. But from an employee's view, income can be unpredictable. And most often, there is a lack of transparency. For the dealership, employees might focus on immediate earnings over customer satisfaction. A well-crafted pay plan can mitigate most of these risks and concerns.
But, one of the biggest challenges for dealers is giving employees a clear and immediate idea of where they stand. Imagine not being able to check your bank balance?! Not exactly motivating, right? Well, we have an interest in helping dealers get clear on commissions and unlock motivation. If you're looking to equip your team with the tools they need to maximize their performance—it's real-time earnings!
A Commission Scenario - What would you do?
Ok, it's time to play Pay Plan Wizard. Here's your situation:
Current Scenario:
- Location: High-volume American brand store in Florida
- Issue: Recent turnover including Sales Manager (SM) and top performers, leading to a green sales team
- Current Volume: 12-15 DTR
- Current Pay Plan:some text
- $200 minis on all cars
- Flat rate per unit increasing in tiers:some text
- 1-6: $275 per unit
- 7-9: $300 per unit
- 10-12: $350 per unit
- 15% of front-end gross capped at $500 per deal
Insights:
- NADA 2023 Compensation Trends and Predictions: Stagnant inventory expected, aggressive pay plans needed
- Challenges: Margins likely to decrease, pressure to sell new inventory
Obvious room for improvement? Here's something else: as a wise old owl, you read our NADA 2023 Compensation Trends and Predictions and see stagnant inventory on the horizon and that we expect more aggressive pay plans to finish out the year. Margins will likely decrease, putting pressure on dealerships and OEMs to sell new inventory. All these factors should hurt your sales and F&I .
For wizard’s sake, consider yourself a Dealer Principal desperately drafting something on you're own. Or an SM/FM working with a GSM. Regardless, you've set your mind on making a commission change only and not a spiff.
You're looking to modify this plan or come up with a new structure that moves new inventory. After talking with the team here are your options to choose from:
A. Introduce an uncapped top tier that retros tier one and pays $600 per unit for sales over 12 units.
B. Boost Front Gross to 20% After 10 Units Sold
C. Drop Minis and Rolling Averages, No Cap on Front-End Gross
D. Do something else
What would you do?
(See our advice at the end of the article)
Now, onto Spiffs...
Understanding Automotive Spiffs
A spiff is typically a cash bonus for hitting a target within a specific timeframe. Spiffs drive immediate, short-term results and shouldn't be tied to core metrics. They can be either cashed and paid out immediately (and taxed accordingly.) Or uncashed and added to the next paycheck.
Some Typical Spiffs from the Sales Floor
- Cash Bonus for Outdated Inventory: Commonly used to move outdated or slow-moving inventory. For instance, a vehicle on the lot for 120 days might have a few hundred dollars spiff added to the normal commission for the salesperson who sells it.
- Salesperson of the Month: Simply, the top salesperson earns a cash bonus, chosen by the manager.
- Contests: For example, the salesperson who sells the most cars between now and Friday earns an extra $1,000.
- Stacking Backend Products: These "back end" products can include extended warranties, service contracts, gap insurance, and various other add-ons that are not part of the vehicle's initial price.
What do we consider when looking at spiffs?
Spiffs are great for engaging the sales floor. They create a sense of fun and competition. They help with short-term goals. We've seen some really fun contests at dealerships leveraging spiffs to motivate employees. Here's some main thoughts behind the need for spiffs:
- Immediate Motivation: Spiffs provide a quick, short-term boost to motivation. The goals are to create excitement and urgency in employees. They must hit specific targets in a short time. This can be particularly effective for driving immediate results.
- Addressing Specific Challenges: Spiffs can be tailored to address specific challenges a dealership might face. For example, if there is slow-moving inventory that needs to be cleared out, a spiff can incentivize salespeople to focus on selling those vehicles.
- Enhancing Employee Engagement: Offering spiffs can increase employee engagement by introducing an element of fun and competition. Looking for a more lively work environment? Contests and bonuses can do that. They encourage employees to work harder and stay engaged.
- Rewarding Specific Behaviors: Implementing spiffs can help steer a team toward specific behaviors or achievements that align with the dealership’s strategic goals. This one can be tough to pull off. A perfect CS score is a common example. Some others include meeting certain reputational quotas or hitting targets on upselling backend services or products.
- Quick Implementation: Spiffs are a quick and easy way to try things and pilot process. This makes them an ideal tool for responding rapidly to changing business conditions or opportunities that require immediate action.
Where do commissions fall short?
While effective, spiffs can cause issues if overused. They should be a small part of the overall compensation plan. If spiffs are the primary motivator for sales activities, there's a problem with your process. Spiffs should be supplementary and fun, not the main driver of behavior. They can also encourage short-term thinking and may not align with the customer's best interests.
Side note- there is also an element of transparency that can cause issues with spiffs.
A Spiff Scenario - What do you come up with?
Ok, back to Pay Plan Wizard.
Current Scenario:
- Location: Mid-volume Toyota dealer group in Nebraska with 6 stores
- Issue: Sales team hasn't met their DTR of 12-20 in the last two months; recent loss of two decent salespeople
- Current Pay Plan:some text
- Bi-weekly base of $2,000
- Commission structure of 10|30% / 14|35%
- $250 minis
You're wondering what's going on? To hit annual goals (so you get a nice Christmas) something has to give. You're a GSM considering kicking in a spiff…
What do you come up with?
(See our thoughts below)
Comparing Commissions and Spiffs
Motivation and Behavior
Commissions provide consistency, a continuous motivation to sell, encouraging sales reps to focus on closing deals so the dealer can maximize revenue. They may also foster long-term client relationships for repeat business. (Looking to get creative? Roll a spiff that rewards long-term relationships.)
Spiffs, on the other hand, offer short-term motivation for specific actions or achievements. They only temporarily shift focus to align with company objectives. Once the spiff period ends, sales reps may bounce back to their usual strategies.
Financial Impact
The financial impact of spiffs and commissions is similar. For cashed spiffs, you'll have to ensure taxes get deducted during payroll. It's best practice to use different accounting and payroll codes for clear financial visibility. Also, if spiffs exceed 10% of total compensation, it's a sign that something is amiss, and management should intervene.
Best Practices for Implementing Commissions and Spiffs in Dealerships
Here are our tips for dealership managers on how to use spiffs and commissions in a cohesive and effective pay plan:
- Ensure commissions form the majority of variable compensation and align with long-term goals.
- Use spiffs sparingly for short-term objectives.
- Maintain transparency and consistency in pay plans to avoid confusion and ensure fairness.
- Annual commission changes at max.This gives salespeople a clear idea of how they will make money for the year and a dealership typically sets annual goals so it aligns with that motion. (Nobody wants constantly changing pay plans!)
P.S. If you're looking for dealership pay plans that get results, we offer an in-depth dive into what we see working best for dealership compensation and some of the most high-performing plans we come across.
Lastly, for your accounting team, be sure you are breaking out spiffs and commissions as separate line items on your P&Ls. This helps keep a pulse on how teams are being incentivized and ensures that spiffs don't get out of control. Separating spiffs from commissions allows the dealer clarity into their incentive programs. And, it clearly shows the areas that need improvement.
Some questions for deeper analysis
- Do you have one employee crushing a commission structure and creating dissension with other employees?
- How often are you proofing out commissions and spiff recipes?
- What metrics are you using determine pay plan effectiveness?
- How can you ensure your accounting team is effectively managing spiffs and commissions?
- How do you know what your employees think of your pay plans, and how management is using commissions and spiffs?
Commissions Scenario? Here's what we'd do
D. Trick question!
Before drafting a pay plan, we'd recommend ramping up support and training. How are your Sales Managers helping sellers sell more? Talk to your team and aggregate ideas of what they'd think would motivate and move inventory quickly over the next 6months. I know- it sounds crazy. But data proves this method much more logical. The most important part, is the salespeople "are in the solution". You can always roll back. Consider options that combine elements from Options A, B, and C to create a balanced pay plan based on team ideas. Give it 90 days and see how it sticks. If you get stuck reach out to us!
Spiff Scenario? Here's what we'd do
Again- go to the team in a quick meeting, provide some food, and come up with ideas. You could roll longevity bonuses for hard-to-fill positions, (non-staking) bonuses to up DTR paying $2k at 15, $3k at 17, $4k at 20, and $500 fast starts. There’s a couple ideas to get you started. Have a look at our Glossary articles for more ideas. If you get stuck reach out to us!
Let's print this washout- we're done here.
So, there you have it—the tale of commissions and spiffs, two sides of the same coin in the high-stakes world of automotive sales. By mastering this balancing act, you're not just steering your dealership toward success. You're driving it full throttle into the fast lane of profit and performance.
By splitting commissions and spiffs and adding best practices, dealerships can make achievable progress with their people, process, and profits. This will also make them more transparent and drive better financial results, no matter your role!
