General Inquiries

Employee Bonus Structure

  • 1.  Employee Bonus Structure

    Posted 29 days ago
    Edited by Brandon Porter 28 days ago
    I am one of the owners of our company and we have struggled for years to feel like we have the right bonus incentive plan for our top division managers.  We have been most often giving a % of the net profit of the whole company for the year, but it has felt uncomfortable to give  our full financial information to managers.  I have considered just doing a portion of their own division but want to encourage commitment to the company as a whole, and I have also considered a % of the gross profit.  Just wondering if any of you out there might share ideas that have worked for you (or pitfalls you wish you had avoided).  Thanks!

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    Brandon Porter
    CFO
    Overley's Services

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  • 2.  RE: Employee Bonus Structure

    Posted 28 days ago
    Hi Brandon!

    It is a common consideration with respect to incentives.  First of all, no bonus should be based upon 100% of profit or gross profit (in my experience and opinion).  The company ownership is due a return on equity and risk before any bonuses on some level of profit are offered.

    If your management team has little of no accountability to controlling costs beyond the gross profit line, then I would focus on bonuses based upon meeting or exceeding a minimum acceptable standard of gross profit dollars.  The base amount (or minimum acceptable amount of GP dollars) should be something that you already pay them to do.  Managing results that exceed that number is worthy of incentives.  Do you incentivize production labor beyond management (if non-union)?  If not, that is something you can carve out of the overall bonus plan, and give the managers some portion of subjective discretionary power (they direct a portion of the labor bonus - if any).  Such methods allow them to reward, in their observations, performance in excess of expectations by the specific worker performance beyond an overall bonus plan for them.

    Bonuses are meant to reward key personnel beyond the planned profit of the normal operations of the company.  That profit is meant to increase equity to fund growth and reduce debt risk; after tax considerations; to have reserves for bad times; and to reward ownership for the risk taken and funds utilized by the business that are not borrowed.  Excess profit is that produced beyond the annual business plan; for better results than planned; in excess of the minimum acceptable planned profit for the year.  I have seen the bonus pool in construction range from 25%-33% of EXCESS PROFIT, and only one client (union) made it 50% of the excess and included all employees, management, production and administration, with another 20% of discretionary bonuses...again of the EXCESS PROFIT.

    As long as the plan is easy to understand, simple in calculation it should be effective.  Discuss that change so that it is understood, and and feedback addressed before implementing however.  I am happy to discuss it with you as a CFMA member anytime.  Incentive plans should have the effect of aiding recruitment and retention of top employees and increasing productivity (profit) for companies, however if poorly designed, poorly understood, or ineffective, the opposite is true...it can be a negative to recruitment (people talk), retention (the grass may be greener elsewhere) and productivity (reduced profits).

    With kind regards,

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    Tony Burruano
    President
    Burruano Group
    Cherry Hill, NJ/Naples, FL
    236.595.2149
    www.burruanogroup.com
    tonyb@burruanogroup.com
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  • 3.  RE: Employee Bonus Structure

    Posted 27 days ago
    Brandon,

    We have evolved on this in a similar way and I just want to share our experience for you.  For many years we paid a bonus based entirely on a net income goal.  This was effective because it kept everyone pulling for the "good of the whole" rather than honing in on their own goals at the cost of everyone else.

    Because we never shared explicit financial information, we would receive feedback about not knowing what the goal was, how close we are to it and whether we actually hit it or the payout was "arbitrary" at the end of the year.  So we started to set other goals that related to net income but weren't the actual net income number so we could share them without baring the soul of the company.  For example we gave them a gross revenue number that we felt pretty comfortable if it was achieved, we would make the net income we had as a goal.  This gross revenue number would shift some based on market dynamics, hiring, etc... and we would communicate why to the staff.  This helped people understand the goal better.

    However, we also would get feedback about people not being able to specifically impact their bonus.  As the company as grown, revenue and profit goals companywide have become more distant as far as something that can be impacted at all levels - or at least it feels that way to a lot of the staff.

    I, for one, was very against going to a fully personalized goal system because in my past that has caused silos, infighting and counter productive manipulation of numbers to suit an individual person.

    What we did instead was develop a hybrid approach.  This is a work in progress and I believe it will take us a few years of tweaking to get it right.  We have set a certain amount of the bonus as still relating to net income / gross profit.  Usually this is around 50%.  This keeps people focused on doing what is right for the company and their coworkers.  The other 50% is pretty customized for the individual.  For instance, I set our Director of Operations goal as 30% based on a graduated gross profit margin scale.  I set that gross margin target in a way that would achieve the net income goals for the company / everyone else.  The sales people have goals related to diversifying into areas we want to work.

    Again, this is in its infancy and you have to be vigilant watching how behaviors are shaped and make note for the next year.  I happen to be blessed with a very good team that takes a long term view and collaborates well.  But human nature is human nature and if your goal is a high gross profit margin, you may no-go a chase that the BD team has identified as a diversification opportunity!  Two goals working against each other...

    Hope that helps.

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    Dan Kever, P.E.
    President
    DDC
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  • 4.  RE: Employee Bonus Structure

    Posted 20 days ago

    Greetings Brandon,

    I can appreciate your thoughts and concerns. It reminds of a story involving a fifteen year-old and his dad. After graduating from a rather expensive-private high school two years early, the kid came home one evening, and demanded to see his dad's check book. Patiently inquisitive, dad asked, why. His son said, he deserved to know. Again, dad asked why, and his son said, because I've saved you money by graduating two years early and I've earned the right know. He continued, I want to use the money I have saved you for the purchase of a brand new muscle car. Our next-door neighbor bought his son a brand new Camaro. He attended the same school for four years, didn't save his dad the extra money, and still received a new car. Don't I deserve one too, dad? I would like to see the check book, please! 

    Well son, dad replied. The money you saved is not for me or you alone. We are happy to see that you have done well with school. And we have made a decision on what we are willing to do for you as an acknowledgement of your phenomenal accomplishment. However, it is for the entire family that your mother and I will determine what happens to any and all the money that is generated in this house. Someday when you're living in your own place, you are welcome to make your own financial decisions. Until then, it will be ours to make, not yours. This was obviously a touchy situation. And I think with the right strategy and design, your concerns can be met.

    Lately, what has been most effective in the bonus incentive marketplace is the position of a non-taxable gains and tax-free distributions approach. Designing a strategy that provides more income to top level management versus what traditional designs and pretax plans have provided over the past can possibly help you with this. The proper strategy, design, and pre-rollout consensus can considerably help transition you out of your open book percentage dilemma while keeping company morale intact.

    We would be happy to learn more about your company's situation and more we'll need to know to help you provide additional value to your company and top-level managers.



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    Ward Powell CEP™
    President
    The Ward Powell Group Inc.
    Chicago, IL 60603
    (312) 629-9100
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