First of all, let me say this: how you compensate your employees, whether it is salary, hourly, commission, or a combination thereof, in itself is not going to make your company run well.
The unique thing about this industry is that we have many ways to do the same thing differently. There is no right or wrong way; it is about what works for you. Just remember, as in making any type of decisions, everything has a cost and a benefit and can also have consequences. Good leaders know and realize this.
I do believe that it is a good idea to sometimes have an outsider’s perspective (fresh set of eyes) to look at what you do and how you do it, and to advise you accordingly. The ARA Peer-to-Peer Mentoring Program is a great resource for our members that are in need of help or advice. This program is just another benefit of being a member of ARA.
In our Mentoring program, we have taken the approach of a patient going to the doctor. Obviously, they are in need of advice or help, and for us to do right by them, we must first know their condition. Like a doctor, we do an evaluation and we make recommendations based on the condition of the recycler. We create a plan of action based on what they need and what we feel their ability is to carry it out.
Cost of Goods and Margins
First, let me start with cost of goods and gross margins. I am an old-timer and have been in the business since 1973. I can say that in my time, I have never seen cost of goods at 10% and gross margins of 90%, at least not in selling recycled auto parts. Obviously today, gross profit ratio is somewhere in the 40% range for most of us.
So, let’s take a look at pay for performance, and instead of pro and con like I previously wrote, we will now call it “theory” and “reality.”
In theory, after all, if business is down, payroll will be lower. In theory, this sounds great, right? Now, let’s look at the true cost of this.
Theory: You are paying people for what they do.
Reality: Now they only do what they get paid for. They are getting paid for quantity, not quality. Because product quality suffers, there is now inconsistency in product. This equals unhappy customers, lost sales, and lost profit.
Theory: When business is down, payroll is less. From the owner’s seat, this looks like a good idea. After all, the biggest business expense is labor.
Reality: For the employee, this creates insecurity and uncertainty. We all have bills to pay, and just as the owners need enough revenue to meet expenses, so do their employees. Also, in spite of their efforts, business may be down due to factors that are beyond the employee’s control.
Theory: Sales revenue and profit will increase.
Reality: For the salesperson, a sale is a sale, whether it is good or bad, profitable or not. Decisions will be made based not on what is best for the company, but what is best for the salesperson at that time. Here is a question I have for all owners: If you have a deal in front of you that has a 50-50 chance of going bad, are you going to make that deal? I would like to think not, but for your commission-based salesperson, if they don’t make the deal, they don’t get paid, but if they do, there is a 50-50 chance they will get paid.
A business that is based on pay for performance will typically have a much higher return rate than a business that is paying a regular wage with team-driven goals or bonuses. Again, more mistakes are made and customer service suffers in a commission-based environment.
Theory: By paying piecework, production will increase.
Reality: Quality will suffer because after all, they are getting paid for quantity. Consistency and your product quality will now suffer. Mistakes will be made that you usually don’t find until the point of sale. This equals lost sales, not to mention unhappy customers.
Theory: Pay them by the stop. When you pay them by the stop, you get more stops. The same rules apply today as they did back in the mid 90’s.
Reality: Because they are getting paid for quantity, not quality, this will have a bad effect on the customer experience. Bear in mind that for most of us, the only direct contact that a person may have with our company is our delivery vehicle, our driver, and our parts on it. The driver is going to be in a hurry to get out of there, in addition to the excessive wear and tear on your vehicle, as well as the increased exposure that being in a hurry while driving will create.
If you look at the technology that we have today in 2021, you can know where your vehicle is, how long they are at a stop, as well as monitor the telemetry of the vehicle, i.e., speeding, hard-braking, and acceleration, to be able to identify and correct bad driver behavior.
Is this the best model for our industry?
It has been well-documented that in most sectors, commission-based pay is a bad model. It promotes and rewards self-achievement. It can destroy teamwork and create tension, uncertainty, and hostility among fellow employees competing for that same dollar.
Is a commission-based salesperson going to become an endangered species in automotive recycling? Commission-based salespeople will have less of a role and will become less relevant. With E-commerce and the internet, going forward there will be less opportunity for the commission-based salesperson. Will owners try to work with and repurpose these people and make them customer service consultants? The smart businesses will use this technology combined with a knowledgeable human to advise, qualify, and ensure a great customer experience. Or, will they now try to replace them with cheaper, off-shore, remote salespeople?
A DEAL IS A DEAL!
If you agree to pay a person a percentage based on what they do, once you make this rule, you should not change it. A deal is a deal. Good or bad, you must honor it and stand behind it. If you have an employee and you are paying them $20/hour, do you go to that employee later and tell him that you want to pay him less? I would like to think not, but if you did, that employee probably would not stay anyhow, or would leave at the very first opportunity that he has. While there are various ways for compensating your employees, whether it is hourly or commission, whatever you choose, once you put something on the table, you cannot and should not take it away.
It puzzles me as to how companies can expect employees to be loyal and look out for the company if they create this culture of “every man for himself” and put employees in an unsecure position. Why should people be loyal and dedicated to a company when a company is not loyal and dedicated to them? Remember, employees are a company’s most important asset.
I agree that we all need a motivated, hard-working crew and I believe that there are better ways to do this.
Recognize and reward your people for doing a good job. Instead of commission, maybe try positive reinforcement, paying an ample salary with a monthly or quarterly bonus for hitting certain benchmarks or goals as a company (not individually), in order to promote a sense of teamwork. Little things, like telling your employees they are doing a good job, or something as simple as the boss paying for pizza or buying lunch for the crew are also good ways to increase company morale.
You have to look at what you expect out of your people and what you are willing to do for them. There is no easy button, and sad to say that the whole pay for performance idea for this industry was presented as an easy way to manage your people. It is not. In fact, it takes more oversight by management to monitor what employees are doing.
You can say what you want and do what you want, but when all is said and done, how your people perform has more to do with leadership, good supervision, direction, and giving them the training, tools, and resources to be successful.
If an auto recycler can’t make it in this industry, it is usually because they have not been willing to put in the time, work, or money to change and adapt, not because of how they pay their people. They have simply gotten left behind because they think they’re still living in the past.
Lastly, on Leadership:
As I have said before, a company’s employees are a direct reflection of its leadership. Strong, hardworking and dedicated leaders will attract and retain the best people and get the best out of them. Poor leadership will only attract poor and under-performing people. Continuity and consistency are crucial to the success of any business. The best companies have the best people because they have the best leaders.
Consultants should not be narrow-minded. No one should make the statement that doing one thing is going to make you a success, unless of course, that one thing is being a strong, hard-working leader, which is what I have been saying all along.
The one thing that I will say in closing out this article, is that over the past 5 years of me writing, it is nice to see some of my ideas being repeated by others. It’s nice that they are now talking about the importance of being leaders, which they never did before, but it was a different world back in 1985, right?
There is no secret sauce to any of this. It all boils down to simple stuff.
- There is no easy button.
- It’s not about how good you are, it’s about how hard you try.
- Lead by example. Don’t ask anyone to do something that you are either unwilling or unable to do yourself.
- Lastly, remember the Golden Rule. In everything you do, ask yourself how would you feel if you were on the other end of this decision?
How you want to run your business is up to you. What obviously works for one does not work for all. The important thing here is to keep your business healthy and viable, now and in the future.
I hope that my thoughts and words have helped others to be better. In everything I say and do, I have the best interests and concerns of the independent auto recycler in mind.
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ARA Secretary · Northlake Auto Recyclers — Hammond, IN
Hollingshead has been in the professional automotive recycling industry for 45 years, including 34 years as President/Owner of Northlake Auto Recyclers, one of the industry’s leading facilities. Hollingshead prides himself on taking a hands-on approach in the business, employing the use of checks and balances for quality control to ensure customers only receive the highest quality parts. Northlake was one of the first automotive recycling facilities in the state of Indiana to receive from the Indiana Department of Environmental Management the Indiana Clean Yard – Gold Level Certification in 2009. Northlake was certified as one of the Indiana Certified Automotive Recycler Exemplary Standards (INCARES) program’s inaugural medalists and was the highest scoring facility in Indiana in 2014, 2015, 2016, 2017, and tied for first place in 2018. Northlake was also the recipient of the 2016 ARA Certified Automotive Recycler of the Year award, having been nominated by his peers in the industry.