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Dealership Management Compensation on Loan Forgiveness

Over the past five months many dealers have relied on the Paycheck Protection Program (PPP) loans to help mitigate business uncertainties, including adhering to government-mandated closures. According to Automotive News, over 80% of U.S. dealerships received PPP loans to assist with business interruptions due to the coronavirus pandemic. One of the larger questions facing dealers in the future is one for which there will be no official guidance: Should management pay plans include the “income” from the PPP loan forgiveness?

Every dealership employed a different business strategy to alleviate the loss (and potential future loss) of revenue during the outbreak, according to their own priorities and needs. In keeping with the intent of the PPP – to maintain employment levels and preserve employee paychecks – some dealers opted to keep employees on payroll even during closures, creating overstated expenses with potentially no corresponding gross or even the opportunity to open their doors to make vehicle sales. That was the bargain with the PPP – that dealerships could retain employees and the cost of those employees would be reimbursed through loan forgiveness. In theory, the net-net impact of the PPP on profits would be zero. After the record volumes and profits generated by some dealers during the months of June and July, it is looking like loan forgiveness could be a dollar for dollar add to profits on the financial statement depending on how the rest of the year unfolds.

Dealership management compensation and commission tied to department gross or bottom line profit are common plans. For pay plans considering only gross, departmental or otherwise, loan forgiveness will not have an impact. For pay plans that are based upon pretax income on the factory statement, there could be major ramifications for recognizing income from loan forgiveness. At first it might seem unacceptable for a GM to earn his or her typical 10% rake on the forgiveness of a $2 million loan. We will now explore some of the factors and arguments worth considering in your pay plan discussions.

For questions or further assistance, please contact a member of Withum’s Retail Automotive Services Group.

Argument for Inclusion

Many dealership management positions use pretax income as an incentive measure, but the PPP funds may have led to overinflated expenses on the monthly factory statements. Even if the store generates a substantial profit for the whole year, those several months of poor performance were dictated by the PPP program and likely inconsistent with the GM’s game plan had PPP not come along. With the PPP restrictions on headcount and salary retention, the GM was unable to make the cuts they’d typically suggest during downturns. In this respect, the PPP income is simply making performance-based pay plans ”whole” for having their hands tied by the government program.

Argument for Exclusion

In most cases the GMs and other managers weren’t involved in the original PPP applications, didn’t attend PPP educational webinars hosted by Withum and state associations, didn’t manage pay plans, didn’t track expenses and didn’t apply for forgiveness. As far as a roles and responsibilities standpoint, it would seem that anything related to PPP would fall outside of the typical GM’s purview. Furthermore, the PPP forgiveness “income” later this year is simply covering the expenses already spent by the dealership earlier in the year. It is not true “earnings” as would be the case if the dealership sold another car. To allow management to share in forgiveness income would be to pay them on a percentage of expenses, not on earnings.

Argument for the Middle ground

It is true that in most cases the GM and other managers had little or nothing to do with the PPP loan application, education, or forgiveness. It is true that the dealership spent real money on potentially unnecessary headcount for which the PPP is simply reimbursing the expense of the program. It is also true that your managers were able to hold on to morale and key talent to execute on what could have been subsequent record months of sales volumes and profits. In some cases compensation may be a legal question for your outside counsel. In cases where there is discretion in the pay plan, it would seem that the reasonable approach would be to allow the management team some minimal level of participation in the income if for no other reason than respect and morale. GMs talk amongst themselves just as dealers do. The last thing you want is your prized GM going to a 20 group or NADA and feel like he or she was the only one to not be paid on the PPP income.

Retail Automotive Services

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