Service Technician Trainee Pay Plan Options – Part 2

David Dietrich Newsletter This is Part 2 in a three-part article. If you missed Part 1, you can read it here: Part 1.

 III. Implementation of the Trainee Pay Plan

 The following seven basic steps, described below, are used to implement the technique:

Step 1 – Obtain the Necessary Data
Step 2 – Calculate the Weekly Sales Requirement
Step 3 – Determine the Trainee’s Weekly Production Objective
Step 4 – Determine the Trainee’s Daily Production Objective
Step 5 – Calculate the Training Bonus Accrual Rate
Step 6 – Test the Calculation
Step 7 – Implement the Bookkeeping Procedures

 Step 1 – Obtain the Necessary Data

 Two of the components needed to make the calculations for a Trainee Pay Plan may be unfamiliar to many service managers and may require some study.  These elements are effective labor sales rate (the actual dollar amount collected for every flat rate hour sold) and effective cost-of-sales (actual dollar amount paid to technicians for producing a sold flat rate hour).

 Ironically, many dealers and service managers believe that they collect their stated labor rates for the various categories of dealership labor when they truly do not.  For example, the stated or posted labor rate for a flat rate hour may be $45.  But in many cases, $45 is not charged for every hour sold.

 Some flat rate hours are sold at less than the stated labor rate for the following reasons, among others:

  1. “Service specials”
  2.  Low priced competitive services such as lube-oil-filters and wheel balancing
  3.  Discretionary pricing by service advisors
  4.  Improper sales accounting

 When a labor rate is posted, lesser rates are often charged and greater rates are rarely charged.  As a result, the “actual” or “effective” labor sales rate is most often less than the posted rate.  The result is that a manager may think he collects $45 an hour when only $36 or $37 is actually collected.

 Astute managers will monitor their effective rate daily and work a plan to reach a predetermined goal.  If a pay plan is based on a “stated” rate and significantly less is collected, the business is in trouble.  This concept is further complicated by the fact that many dealerships have different rates for different categories of work.  Customer pay may be $42.31 effective, warranty paid at $42 for one franchise, $39 for another and internal only $30 per hour.  The effective rate cannot be calculated by simply adding up the rates and dividing by the number of rates.  The volume of business at each rate determines the outcome.  A “simple average” calculation will not work.

 The same is true of the effective cost-of-sales, but in the opposite direction.  It is not unusual to find a service manager “thinking” that the average rate paid to a technician for the production of a flat rate hour is actually more than their estimate.  Effective labor sales rate and effective cost-of-sales are two major areas of opportunity to which we pay critical attention.

 If the tools and techniques are not in place to monitor these very important elements, they have to be determined before trying to calculate the Trainee Pay Plan.  Failure to do so will result in a pay plan that will not meet its objectives.

 The best way to determine these “effective” rates is to conduct surveys of:

  1. Closed repair orders
  2. Technician pay records

To learn the effective labor sales rate, first obtain at least 250 recent repair orders that represent all the categories of work performed by mechanical technicians.  The repair orders must include:

  1. Labor sales amounts by labor category
  2. Flat rate hours paid to the technicians in each category.

We often use the business office’s accounting copy for this task.  List every repair order by number and record the labor sales and flat rate hours paid in each category of work.  After all repair orders are tallied, total the flat rate hours and divide the sales amount by the total flat rate hours.  The result is the effective labor sales rate.  250 repair orders usually gets the job done.  A larger survey will ensure a more accurate figure.

A similar task will have to be performed to determine the effective cost-of-sales.  You will need pay records for all technicians accounted for as cost-of-sales for at least three months.  The pay records must include the total wages paid for labor hours sold and/or accounted flat rate hours used as the basis of pay.

Divide the total wages paid for productive labor and unapplied time (accounted for as adjustments to cost-of-sales) by the total number of flat rate hours produced for those wages.  The result is the effective cost-of-sales.  If technicians are not paid by the flat rate hour or flat rate hour records are not kept, the task is much more involved and requires a process infinitely more complex than can be explained in this article.

 For example, assume the following in a five-technician shop:

Technician

Hourly Flat Rate

Technician 1

$15.00

Technician 2

$13.00

Technician 3

$12.50

Technician 4

$10.00

Technician 5

$  8.00

 

$58.50 ÷ 5 technicians = $11.70

 

Thus, your average cost per technician is $11.70 per hour.  However, one extremely important factor has been left out of the equation—hours produced.  So let’s assume the following:

Technician

Hours Produced

Technician 1

70

Technician 2

50

Technician 3

45

Technician 4

40

Technician 5

30

 

Now we can calculate the cost-of-sale.

Technician

Hours
Produced

÷

Total Hours Produced
Percent of Work

x

Pay
Rate

=

Contribution to
Total Cost

Technician 1

       70

 

            29.8%

 

$15.00

 

$  4.47

Technician 2

       50

 

            21.3%

 

$13.00

 

$  2.77

Technician 3

       45

 

            19.1%

 

$12.50

 

$  2.39

Technician 4

       40

 

            17.0%

 

$10.00

 

$  1.70

Technician 5

       30

 

            12.8%

 

$  8.00

 

$  1.02

 

     235

 

          100.0%

     

$12.35

 

Technician 1 produced 70 ÷ 235 total = 29.8%

 In the examples included on the Pay Plan Worksheet (Annex A), the trainee’s weekly salary is $240.  The current cost-of-sales percentage is 34%.  The current effective labor sales rate is $36.50 and the effective cost-of-sales is $12.35.

 Step 2 – Calculate the Weekly Labor Sales Requirement

 Naturally, the trainee’s weekly salary must be covered by the service department’s gross profits.  Calculate the labor sales necessary to generate enough gross profit to cover the trainee’s wages by dividing the trainee’s weekly salary by the current cost-of-sales percent (COS %).  For example, the COS % is easily calculated by subtracting your current labor gross profit percent from 100.

 We suggest that an additional 1 percent be subtracted from the COS % to provide a “cushion” for any unexpected changes in gross profit percentages.

 Using the example presented on the Pay Plan Worksheet (Annex A):

 $240 (weekly salary) ÷ 0.33 (34% COS – 1% = 33%) = $727.27 (sales requirement)

 Step 3 – Determine the Trainee’s Weekly Production Objective

 The program is intended for the trainees to generate enough billable labor themselves to cover their own wages.  This weekly production objective is easy to calculate in a flat rate environment by dividing the trainee’s weekly labor sales requirement by the overall effective labor sales rate.

 Using the example presented on the Pay Plan Worksheet (Annex A):

 $727.27 (sales requirement) ÷ $36.50 (effective rate) = 19.9 (FRH weekly production objective)

Steps 4-7 will be continued next week in Part 3!

 

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