Finance and insurance income has climbed 64 percent at Munday Mazda in Houston since Bruce Wertz became general manager last August.
Chargebacks and errors at the Houston dealership dropped from 22 percent to less than 5 percent when Wertz took the job.
Wertz says he owes the turnaround to a revised compensation plan for F&I managers. The old plan paid a 15 percent commission on net F&I income per vehicle. The new plan pays a 5 percent base commission and up to 10 percent more based on sales of aftermarket products, such as service contracts and credit life insurance.
Wertz says the straight 15 percent commission tends to promote finance income. "Finance managers take the path of least resistance," Wertz explains. "It is easy to sell rate."
Industry consultants say many dealers are revising pay plans to reward product sales.
They attribute the change to several trends:
- F&I income tends to rise when there is an incentive to sell more aftermarket products.
- Auto lenders have imposed caps on interest-rate markups. Dealers must make up lost finance income with product sales.
- The focus on products reduces chargebacks. A chargeback happens when a customer refinances or pays off a loan early. The dealer doesn't get the full finance income. If finance managers try to make most of their income on rate, rates tend to be uncompetitive, and customers are more likely to refinance.
- Product-oriented pay plans reinforce menu selling. Dealers are requiring finance managers to use menus to present all products to every customer.
- Products offer tangible benefits to customers. Taking the focus off rate makes the sales process more customer-friendly.
"You can't justify to customers that they need to pay a higher interest rate because it provides a benefit," says Bryon Houghton, a finance and insurance specialist for Kansas City-based NCM Training & Consulting.
"But you can make a very good case for buying a service contract that will benefit them if their car breaks down or a theft recovery system to help recover their vehicle if it is stolen."
Carrot and stick
Dealers are promoting product sales with a carrot and a stick. They are paying higher commissions for increased product sales and, in some cases, limiting the amount the dealership can make marking up the wholesale interest rate from the lender. In some cases, dealers cap both rate income and product income to prevent price gouging and to ensure that F&I managers sell a broader range of products.
Tampa-based Ferman Automotive Group, which has 15 dealerships in west central Florida, is paying tiered commissions, rewarding F&I managers for higher sales of every product the stores sell.
"I don't think it is bad to make a finance reserve," says Steve Straske, Ferman's vice president and corporate counsel. "We are merchants who sell money, and customers truly benefit from having us do that service for them."
But the new emphasis on product "is more beneficial to the customer and generates fewer chargebacks," Straske says. F&I income has increased about 10 percent since the compensation system was revised.
James Ganther is vice president and general counsel for F&I vendor Continental-National Services Corp. in Tampa. Ganther says some dealers are setting more stringent limits on rate markups than the standard 2.5 percent cap imposed by lenders. Often dealers set a range for markups, such as no more than 2 percent and no less than 0.5 percent, he says. "They are told to start negotiations at 200 basis points and go down to 50," he says.
Becky Chernek, who heads Chernek Consulting Inc. in Suwanee, Ga., says dealers should shoot for 60 percent of F&I income from product and 40 percent of income from finance. Chargebacks should be no more than 12 percent, she says.
Chernek says those targets can be reached through a pay system rewarding product sales.
One of her clients is dealer Bill Gwatney of Gwatney Chevrolet in Jacksonville, Ark. Gwatney pays his three F&I managers a commission on the income they produce directly. He also creates a bonus pool that is split between them based on their contribution to total department income and on the number of customers they handled.
"It is not just an incentive to produce," Gwatney says, "but an incentive to talk to customers.
"Sometimes they don't want to work with certain customers - maybe customers who finance through a credit union or (cash) customers who are just writing a check. If they are talking to customers, they are working harder."
Gwatney launched a product menu presentation in 2003 to encourage F&I managers to offer every customer every product the dealership has for sale. He particularly wants to push service contracts because service plans help drive service and parts sales.
Menu selling is mandatory. A computer-generated copy of the menu showing a date stamp reflecting the time of the transaction must be kept in the customer's file. Gwatney often checks the files for menus to ensure the F&I managers are using the menu presentation.
Says Gwatney: "If they don't want to menu-sell, they can't work for me."
You may e-mail Donna Harris at [email protected]