Technician Trainee/Apprentice Pay Alternatives – Part 3

David Dietrich NewsletterThis is Part 3 in a three-part article. If you missed Parts 1 and 2, you can read them here: Part 1, Part 2.

III. Implementation of the 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

Refer to the Pay Plan Worksheet presented in Annex A to calculate the actual rates that will pertain to your own circumstances. The instructions and examples in this section apply to the worksheet.

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 they collect $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 consultants 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 a 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.

M5 consultants 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%
$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)

Step 4—Determine the Trainee’s Daily Production Objective

It is important to monitor the trainee’s daily production—therefore, a daily production objective must be calculated, rounded to the nearest half-hour, by simply dividing the weekly production objective by the number of work days per week.

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

19.9 (FRH weekly production objective) ÷ 5 (work days per week) = 4.0 (FRH daily production objective)

Daily production objectives should always be rounded up. Management is responsible for ensuring that the trainee has the opportunity to reach that objective every day.

Management must insist that trainees turn in their completed flag sheets for daily review. Failure to manage trainee production objectives every day often results in trainees not producing enough flat rate hours early in the week. They miss their weekly production goals because management was unable to take corrective action early in the pay period.

Step 5—Calculate the Training Bonus Accrual Rate

Calculate the bonus accrual rate, or the amount set aside for distribution to other technicians after the trainee has met their objectives. Subtract $2 from your effective cost-of-sales to determine the bonus accrual rate.

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

$12.41 (effective cost-of-sales) – $2.00 = $10.41 (bonus accrual rate)

Step 6—Test the Calculation

As with all programs that deal with pay plans, the calculation should be tested prior to employment to measure the probable outcome. The following sample test should satisfy the validity of the pay plan.

1. Multiply the trainee’s production (flat rate hours) by the effective labor sales rate to obtain labor sales.

36 (FRH trainee production) x $36.50 (effective labor sales rate) = $1,314.00 (labor sales)

2. Multiply the bonus accrual rate by the trainee’s production (flat rate hours) over the objective to obtain the bonus accrual amount.

$10.41 (bonus accrual rate) x 16 (FRH trainee production over objective) = $166.56 (bonus accrual amount)

3. Subtract the trainee’s wages and the bonus accrual amount (bonus accrual rate multiplied by flat rate hours over the trainee’s objective) from labor sales to obtain the gross profit.

$1,314.00 (labor sales) – $406.56 (trainee wages ($240.00) + bonus accrual amount ($166.56)) = $907.44 (gross profit)

4. Divide the gross profit by labor sales to obtain the gross profit percentage.

$907.44 (gross profit) ÷ $1,314.00 (labor sales) = 0.69 (69% gross profit percentage)

5. Subtract the gross profit percentage from 100 to obtain the cost-of-sales percentage (COS %).

100% – 69% (gross profit percentage) = 31% (COS %)

In this example, the plan attains an acceptable gross profit percentage when properly tested and therefore qualifies for implementation.

Note: the average domestic vehicle trainee turns 30.0 hours under this program. The average import vehicle trainee turns 36.0 hours under this program.

Step 7—Implement the Bookkeeping Procedures

As with any change that deals with payroll issues, effective communication with the dealership’s business manager and/or payroll administrator is absolutely essential. The following accounting techniques have proven to be acceptable in most situations. Every business office’s procedures vary, but these tasks should be accommodated by the procedure that is employed.

1. Cost each repair order at the trainee’s stated hourly rate.

2. The service manager must provide the accounting office with a summary of the total flat rate hours produced by each trainee for each pay period. From this summary, accounting will determine the wages paid to the trainee other than cost-of-sales included in Item 1. above that must be accounted as “training expense.”

3. Create an accounts payable account for each trainee to accrue the bonus amounts generated by each trainee. Bonuses are calculated by subtracting a trainee’s individual weekly production objective as calculated in Step 3 from their actual flat rate hours produced and multiplying the remainder (if greater than zero) by the trainee’s bonus accrual rate as determined in Step 5. The Trainee Technician Bonus Accrual Summary worksheet presented in Annex B can be used for this purpose.

On a monthly (or pay period) basis, expense the bonus accruals to the service department’s training expense account and increase the appropriate trainer’s accounts payable account by the same amount.

i.e., (+ Training Expense/- Accounts Payable)

4. When the bonus accrual is distributed by the payroll department to the training technicians involved, the accounts payable account is reduced by the amount paid. Pay on the individual payroll as a bonus. The payroll journal will record the bonus that was distributed from the appropriate accounts payable account.

i.e., (+ Accounts Payable/- Payroll cash in the bank

5. In the event the bonus accrual is forfeited as described in Section II (last week’s article), the entire accrual amount should be applied to reduce the accounts over a period of months or allowed to be cleared during the annual audit by reclassification by your auditors.

i.e., (+ Accounts Payable/- Training Expense)

IV. Summary

Outstanding results have been obtained in dealership after dealership that have used the Trainee Plan. Commissioned technicians do not see the trainee’s production hurting their earning potential as much as with other plans. Senior technicians show a greater interest in helping trainees because it does not take much time away from their own production. Trainees are used less as “go-fers” and learn more in a shorter period of time.

The pay plan benefits the training technicians in a matter that is financially sound for the department. Management finds it much easier to develop and maintain a plan for a trainee’s development. Trainees normally avoid being assigned to “dead-end” jobs that break their spirit early in their careers. Now their wages are easily adjusted to the pace of their development.

Like anything worthwhile, the plan takes a considerable amount of work to properly implement. But done properly, it will pay big dividends to the department and the dealership.

V. Annexes

 

About the Author