Figuring out the Rules of the Road for Incentive Compensation  

23 October 2015:

It’s difficult to design an incentive compensation program that rewards employees for driving organizational success—rather than inspiring them to game the system. But for Erik Day, the dilemma is that much more challenging because of the topsy-turvy service business he’s in: auto sales. He’s faced with trying to calculate bonuses before he knows how much the company can spend on them.

Car dealers like the Miami-based Warren Henry Automotive Group, where Day serves as CFO, have had to keep up with each swerve of the industry. Car buyers, who used to depend on salespeople for advice, now conduct their pre-purchase research online, gathering information they can leverage once they cross the threshold of a dealership. If they need help deciding what their target price should be, they can turn to such information-providers as TrueCar.

The rebalance of power between dealers and buyers has resulted in slender—in some cases, emaciated— margins on transactions. Between 2003 and 2013, the average gross margin on a new car slid from 5.5% to 3.8%, according to the National Automobile Dealer Association. For a dealer, the average gross profit per new car amounts to about $1200. Offsetting that erosion requires more than just taking car-buyers on a friendly tour of the service area or pitching them on the value of extended warranties.

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Source: CFO Daily

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