I often hear theories about why pay for performance doesn’t work in the auto recycling business. In my 25+ years of consulting, I’ve heard more reasons than I can count. In that same 25 years, I can honestly say that I haven’t seen any yard do it that didn’t get large increases in both sales and profits while paying their staff more. Over the years, I’ve heard many operators say they just couldn’t do it. Sadly, most of them are gone.
I am one of the “old timers”, that saw gross margins of 90% and costs of goods of 10% move to gross margins of 45% and costs of goods of 55%. Imagine, at one time, for every dollar you spent on cars, you got ten dollars in sales. Spend $20,000, and get $200,000 in sales. Those are real numbers from 1980. Today, for every $5,500 in purchases, you will get $10,000 in sales if you are handling late model cars.
This article is about that compression in costs and profits, and how we have evolved and survived in a business that is far different from what it was in 1980.
Making the change to pay for performance takes guts and perseverance but it is worth it.
Some of the pros and cons of pay for performance.
PRO – Sales will go up. When I first introduced sales commissions, many of my salespeople were anxious. Over a 90-day period in 1985, our sales (which had never been above $100k in a month), went to $140k the second month and doubled to $200k in month 3. We had 7 sales persons, and 3 of them had left (the ones that couldn’t sell enough to make their prior salary). In those days, everyone made at least $700 per week, regardless of what they sold. All made considerably more, and I didn’t care! Our percentage of returns did not change after we moved to pay for performance.
CON – Sales persons sell things that only benefit them, for prices that make the product move. Well, yes, of course, if you let them. This isn’t a pay-for-performance comment; it’s a lack-of-management issue. In the old days, we let the salesperson guess or rely on their intuition to set prices. Today, YOU have to set prices and hold people accountable.
PRO – When we started paying by the car, production increased 80%. We designed the plan where our dismantlers made a fair amount per car (much less than our unit cost under our old plan), and they dramatically increased the number of cars they processed. Forty percent of the dismantlers quit, but the ones who stayed zoomed to $900 per week, double what they had been making. They loved it.
CON – Quality will suffer. Of course, it did. For a month. Then we did what leaders do. We instituted a penalty if parts were damaged. They hated it, but we explained why quality was important, and we bought another forklift, so our dismantlers didn’t have to wait to use one, and we built carts and equipment that made storing, moving and stocking the parts faster and reduced the chance of them getting damaged. The ones that stayed were in love with the new compensation program.
PRO – When you pay by the stop, you get more stops. This was in the mid-1990s.
CON – Drivers will be rude and damage parts, and not be willing to wait at the customer’s shop. Again, we installed measures to prevent these things from happening. We had different rates for different routes because some routes had more traffic or windshield time than others. The staff loved it. If they finished all their deliveries, they got to go home early, and if they had enough parts to work them for the full day, they made a LOT more money. This one is far from anecdotal. When Ford bought my yard, I had pay per stop, but none of the other 25 locations that Ford owned did. I was asked to roll it out to the rest. After almost a year, the task was complete. The jury was in! Average stops per driver at 24 locations, 22 per day. At the one location in Detroit, where the union would not allow pay by the stop, it was 13.
The increased productivity and revenue that pay for performance produces has been documented over and over. It’s the only way to go. I wish I had kept the charts and math from all my clients.
Some have suggested that you must learn how to motivate and reward people without pay for performance, and then you can get the same results. Nothing could be further from the truth, at least in our industry. The shift to performance-based pay is just one more change that has come to our industry, and must be done IN ADDITION to proper leadership.
To find and keep great employees, you must:
- Recognize and reward people for doing a great job.
- Offer fair compensation (Pay for performance will pay your people more than the normal rate, allowing you to attract the best employees)
- Make your employees feel relevant and appreciated.
- Provide training, resources, tools and whatever else they need to be their best.
A deal isn’t always a deal – You should be continually fine tuning your programs, especially sales programs, to get the best results. When you couple those changes with good leadership and treat everyone like a king or a queen, you will indeed have a loyal crew. These insights are based on my own experiences implementing pay for performance with a company that grew dramatically year over year and from my consulting experience helping dozens of clients achieve similar results. There simply isn’t any other way to overcome the margin loss and price compaction we’ve endured over the last 40 years.
Get off the nickel. I am astounded when I get a consulting assignment and the yard is on its knees about to close, but the owner is still paying salaries to salespersons for mediocre results. In fact, many times the owner has stopped drawing a check so he can still make payroll. Recognize your responsibility. For every employee you have there is probably a child and a spouse. Triple your head count. That’s how many people are really counting on you to do the right thing and keep the business open and profitable. Of course, it’s hard. That’s why many don’t make this needed change and eventually get to the bottom of the hill. Remember, coasting will only get you to one place: the bottom of the hill.
Ron Sturgeon, Mr. Mission Possible, has been a successful business owner for more than 35 years. As a small business consultant, he can deliver wisdom and advice gleaned from an enviable business career that started when he opened a VW repair business as a homeless 17-year-old and culminated in the sale of several businesses he built to Fortune 500 companies.
Ron has helped bankers, lawyers, insurance agents, restaurant owners, and body shop owners, as well as countless salvage yard owners to become more successful business people. He is an expert in helping small business owners set the right business strategies, implement pay-for- performance, and find new customers on the web.
As a consultant, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plainspoken style, providing field-proven, and high-profit best practices well ahead of the business news curve. Ron is the author of nine books, including How to Salvage More Millions from Your Small Business.
To inquire about consulting or keynote speaking, contact Ron at 817-834-3625, ext. 232, rons@MrMissionPossible.com, 5940 Eden, Haltom City, TX 76117.