How Are You Preparing Your Pay Plans?

Pay plans are critical to your business. They describe how employees will be paid.

Pay plans can lead either to employee satisfaction or to dissatisfaction, even lawsuits with the possibility of significant liability. For a document with such significance, one would expect the format and terms to be standardized. But that is often not the case.

While the industry lore of a pay plan on the back of a napkin is unusual, dealers still regularly create pay plans from scratch, particularly for managers. When doing that, critical items can be misstated, or even forgotten.

Here are problems we see regularly:

  • Verbal pay plans “everybody knows”. A verbal pay plan is no pay plan. You will be surprised at how little “everybody knows” if there is a dispute. All pay plans should be written.
  • Undated pay plans. Have you ever searched through an employee’s personnel file to determine what pay plan was in effect during a particular time period? Pay plans should be dated so you know their chronology.
  • Unsigned pay plans. In the car business if a document was not signed it was not seen. Make sure an employee signs the pay plan.
  • Pay plans that are contracts. When you hired the new manager with an increased pay provision for ninety days, did you intend to guarantee employment for that period? Probably not. But if the pay plan is not worded correctly, you may form a contract when the employee signs. The pay plan should include a disclaimer of contract. It should clarify it is simply a description of how the employee will be paid.  It should state that the employee is employed at will – the employee may leave at any time, or the employee may be terminated at any time.
  • Careless description of compensation. How will the employee earn compensation? Be specific as to any salary. If there is a commission, define that. If there is a draw against commission, state that. If there is a bonus, state the basis for the bonus, and clarify it is in the discretion of management.
  • Poor definition of the commissionable base for salespeople. The top source of pay plan litigation against dealers by sales employees is because of a poor definition of the commissionable base. For salespeople, pay plans often simply provide that a salesperson will be paid on net profit per vehicle. A disgruntled salesperson may claim that means the selling price less the cost of the vehicle, with no provision for packs, clean up, reconditioning, or other common deductions. To a judge or jury with no experience in the business, that may make sense leading to liability of hundreds of dollars per vehicle sold. The pay plan should state that the salesperson earns a percentage of “commissionable net profit” on the “commissionable base”. It should clarify that the commissionable base is determined in the sole discretion of the dealership management, it includes costs to be determined in the sole discretion of dealership management, and it can be changed from time to time.
  • Poor definition of commissionable base for managers and other employees that are not salespeople. Be specific about the base against which the commission percentage will be applied for a manager. Is it specific accounts on the financial statement? Is it specific revenues less defined deductions? The pay plan should spell it out.
  • Poor definition of when commissions are earned. To a judge or jury with no knowledge of the car business, it may well be reasonable to agree with a disgruntled employee plaintiff that a commission is earned when vehicles cross the curb. However, that is seldom the case. Generally, commissions are not earned until a deal is neat and complete and the revenue hits the books. The pay plan should be clear about that.
  • Poor definition of when an employee will be paid. The pay plan should be clear about the date on which an employee will be paid. Otherwise, a disgruntled employee may contend the right to be paid daily, weekly, or some other time period that does not work for the dealership.
  • Poor definition of conditions to payment. Is there a CSI component in the pay plan? Is there a minimum delivery component to the pay plan? If there are conditions to enhance earnings, those should be spelled out.
  • Failure to provide for deficit carry forward. It is not unusual for an employee to sometimes run a deficit in a slow month. If it is the policy of the dealership for a deficit to be carried from month to month until repaid, the pay plan should state that. Remember: you can never recoup a deficit if it will reduce the employee’s earnings for any period below minimum wage.
  • Failure to provide for correction of errors. The pay plan should specifically provide that errors can be corrected and pay can be recomputed.
  • Failure to reserve the right to change the pay plan at will. Pay plans are not written in stone. The dealer should have the right to change the pay plan at its discretion with notice to the employee.
  • Rights to benefits. Will the employee have rights to benefits? If the employee is part time, that should be stated and the maximum hours should be stated. If the employee has rights to benefits, identify where the employee can learn more about those rights.
  • Failure to identify demonstrator rights. While demonstrators are less common in dealerships today, if an employee has the benefit of a demonstrator, it should be clear the benefit is subject to the discretion of management, it can be withdrawn at any time, and the vehicle to be assigned shall be determined by management in its sole discretion.