CASE STUDY $-$ A NEW INCENTIVE SYSTEM AT THE AUTO DEALER?

You have been hired by a relatively large local automobile dealer to design a new compensation and

incentive system for several positions that make up the bulk of the firm's workforce. These positions

are:

$10$ administrative positions$-$These positions involve the day$-$to$-$day operational facets of

running the dealership$-$answering phones, working at the customer service desk, filing

paperwork, pulling records on cars, and so forth. These employees are currently paid on an

hourly basis. The turnover rate is about $30\%$ for these positions. There have been several

complaints about the courtesy and helpfulness of employees occupying these positions.

$40$ sales positions$-$The employees occupying these positions are primarily focused on

selling cars and are paid entirely on commission. The turnover among these employees is

fairly high $($about $80\%$ leave each year$),$ although a few of the sales staff have been with the

dealership for a number of years.

$15$ service positions $($mechanics and detailing personnel$)-$The employees occupying these

positions are paid on a standard hour plan $($that is$,$ their pay is based on how much time it

should take to perform each repair$).$ The turnover among these employees is very low. As in

any other dealership, there have been some complaints about the quality of the service the

firm's mechanics deliver. A number of customers have had to bring their vehicles in several

times before their auto problems were properly repaired. The detailing personnel generally

are also tipped by customers.

The goals of the dealership are primarily to make money on the sale of new and used cars, although

increasingly the service department is generating more income. There are several challenges you

must consider before you make your recommendations:

The dealership's profitability is fundamentally influenced by the number of cars sold and the

prices of those cars. In addition, the dealership's profitability is enhanced by $($a$)$ repeat

business $($b$)$ the company's reputation $($c$)$ customer retention and repeat business by way of

servicing. Historically, repeat customers represent a sizable amount of business; the dealership

gets to sell their used cars they traded in and also sells them new cars. Moreover, customer

loyalty matters a lot because word$-$of$-$mouth advertising generates business.

Service quality in terms of the sales process as well as the service department $($mechanics$)$ is a

critical component of customer satisfaction and affects the amount of repeat business

dealerships get.

The income salespeople earn is directly related to the profitability of each car they sell. The

prices on the cars are somewhat negotiable. Under the current system, the sales staff and the

dealership split the profits $50-50$ from every transaction.

QUESTION: Formulate and discuss TWO different incentive mixes that you would suggest to the

auto dealerships to cover all three sets of employees.

The following areas are to be addressed.

$1.$ Case analysis$-$ What are the problems that the business needs to solve?

$1$a$.$ What are the compensation issues?

$2.$ Relevant theory applicable to the exercise and TWO different incentive packages that would respond to the needs of the business

$3.$ You must conclude with a recommendation as to why one package is better than the other