Case1: Why Wheelers Chevrolet Drove Away from Commissions

Wheelers Chevrolet in Marshfield, Wisconsin, pays its salespeople a salary plus a flat commission per vehicle sold: $200 per used vehicle and $170 per new vehicle. On average, a salesperson at the dealership sells 10 to 15 vehicles in a month. This pay structure contrasts with what has been the norm for years in the car industry: commissions tied to the profits earned on each vehicle sold.

One reason Wheelers de-emphasizes commissions is that the dealership wants to put the focus on great relationships with customers. Rewarding for quantity sold instead of profit per car "takes the friction out of the negotiation process," according to Mary Jo Wheeler-Schueller, dealer principal and a co-owner with her brother. Indeed, customers who have posted reviews of their experience at Wheelers Chevrolet praise the service, saying again and again that they appreciated the way they were treated.

Including a salary in sales staff compensation also takes off some pressure, which makes the jobs more attractive. Wheeler-Schueller says this is particularly helpful for attracting female employees. She is the second generation of Wheelers in the car business, and she wants to continue her family's practice of filling key jobs with women as well as men in this male-dominated industry. She has found that women are likelier to see a commission-based pay structure as a barrier. Other dealers with similar arrangements report that employees earning a salary tend to stay at the dealership longer, reducing the costs of employee turnover.

A reason Wheeler-Schueller didn't mention is attracting the attention of other dealers: profit-based commissions might no longer be very motivating. As consumers have found more ways to compare car prices, the profit margins at dealerships have decreased. A few years ago, the National Automobile Dealers Association reported an average gross margin of 4.2% of the selling price. Only a share of this percentage goes to dealers, which frequently leaves them earning just the floor amount, typically $50 to $150 per car. A car dealer selling 10 cars per month would take home as little as $500 for a month's work. Some exceptional salespeople might be able to sell enough at the high end of the profit range to earn a good living. Wheelers Chevrolet, however, has driven its compensation plan to what it sees as greener pastures.

1. What kind of workers would be most attracted to earning profit-based commissions?

2. What kind would be most attracted to the pay structure at Wheelers Chevrolet?

Case 2: Thanks, but We'd Rather Have Cash HR Oops!

High-tech giants like Apple and Twitter make the news when they announce they will be awarding stock to employees. With the stock prices of such companies soaring, it's easy for employees to see that these awards have value. But smaller companies find the benefits of this kind of incentive pay to be a little more complicated. Consider Zayo Group Holdings, a maker of Internet infrastructure. It began giving restricted stock to all its employees, including call center staff and administrative assistants. The value of the stock for a tech support worker in a call center equaled about 10% of the employee's total pay. But management soon realized that some employees didn't understand what they were getting. The stock was "restricted," so they couldn't sell it for cash until it "vested," and they didn't know what that meant. They wondered how they could pay all their bills when part of their income was in a form they couldn't spend. Add in the fact that stock prices are variable, and employees started to wonder if they would ever actually see any money from the stock grants. Indeed, stock grants are harder to understand than a paycheck. For example, if the stock award is restricted stock units, such as Zayo Group awarded, the value of the stock is taxed as income at the time employees receive it. If the company gives employees stock options, these are taxed as income if and when the employee exercises the option to sell the stock. And employees have to know how to get the most value from the stock: deciding when and whether to exercise stock options or what to do with a stock granthang on to it or sell it and invest the proceeds. Zayo Group addressed the pitfalls of its stock grants by teaching its employees about stock and its potential to grow in value. Proper training and access to investment advice can help make this form of compensation live up to its potential as incentive pay. Other employers, notably Google, test employees' reactions to various kinds of incentives. Google tried giving large grants of stock to top performing employees, but instead of energizing employees, the program raised doubts that some employees would ever have a chance to earn the awards. The company found that a more effective incentive was a program in which more employees had a chance to earn rewards that delivered experiences, such as dinners or trips.

Questions

3. If you had a chance to earn a $1,000 cash bonus or $1,000 worth of stock in the company you work for, which would you choose? Why?

4. Is it a mistake for a company to give employees an award of restricted stock without also training them to understand stocks and investing? Why or why not?