Employee Bonus Plans - Salary & Bonus Mix

We have a Bonus tied to the Net Income. Every position in our company has a score card with specific target KPI's. If the company as a whole hits their NI target for the month the entire company has access to a % of their base pay based on the score of their score card. I'm trying to determine what a good mix would be for base and bonus. Three people are around 93% Base and 7% Bonus and two are 85% 15%, respectively. Our Sales staff is running about 60/40.

There is no quick and easy answer to this question, however I like the concepts in a book titled, "Ownership Thinking" by Brad Hams. This was referred to me in my CEO forums in Silicon Valley.

Ed

The book ties in Wayne's comments above.

That's funny because that was the basis for starting the program; how do you get people to invest in the company and care about increasing profits and decreasing expenses? Get them Thinking Like an Owner. We rolled the bonus program out with that exact language. It has really worked and made people start doing little things like recycling paper; reusing garbage bags (if they only had paper in them). So for my team what I do is give them real life examples of how they can save the company money. One example was my accounting assistant; I noticed "convenience" charges for paying certain bills online versus cutting a check. We could save money if we issued a check with the rest of our payables versus paying the vendor a fee to process an online payment. Simple things like that has changed the way people think and do their jobs.

Christie, I applaud you for your inclusion of the administrative staff in your incentive program. For too long the mindset of management has been to focus on sales alone and to think of support staff in terms of a needed evil to process the paper work and a drain on the real stars that are the sales staff.

Yet what are sales alone without all of the things that ensure that they are profitable? How do you measure the value of a purchasing department that keeps the items needed for sale in stock, or who negotiates the best prices for a higher margin? Or who looks for correct quantities to save on shipping? What good is a sale without someone to collect the money? What good are sales without someone to verify that they are all invoiced? What are sales alone without someone noticing that perhaps freight charges are not being invoiced and the margins are too thin?

And what about the cost savings of accounts payable who timely pays for cash discounts? Or someone to manage the phones when the customer calls? What if there were no shipping or receiving staff to ensure that the products were packaged and shipped timely? Or someone to negotiate the best freight costs?

The list of ways that support staff not only enhance the sales, but make them possible in the first place is vast. While it is true, one cannot easily find a metric to see their contribution as is the case with sales, an argument can be made that without them the sales would lend much less profit. By incenting ALL staff as you are and not failing to acknowledge their value, you will see more profit than those who focus on sales alone.

It is difficult to lay a percentage to this. I once had a manager ask us for ideas to cut costs and he promised to reward us. We came up with a lot of great ideas which were put into practice. I wish you the best of luck in your ventures.

Thanks Shelia!

We have a bonus program that is based on a percentage of salary, which varies by role. Half of that bonus is tied to revenue goals so everyone benefits from the growth of the company and everyone is aligned with supporting the sales team. The other half of the bonus is tied to personal goals.

At the beginning of the year, everyone establishes ~5 personal goals (implement a process improvement, shorten monthly close time by x days, etc.) that are aligned with corporate objectives. At the end of the year, the employee and manager assess if/how the goals were completed and an achievement % is assigned that determines the ultimate bonus payout. I personally like that the program has one part tied to company performance to keep everyone vested in the company doing well and then the other half keeps everyone motivated to improve the operations and/or their skill set, which ultimately helps the company as well.

I worked at a company, as Finance Manager, which also had a monthly incentive program to almost all employees. One key issue that arose when we reviewed the program was the appropriate amount of incentive. It should really encourage and motivate the employee toward the company's goals. For sales people, about 50% of compensation was in the form of incentive, from which about 60% depended on sales and 40% in other metrics, such as collections, number of clients, etc. In non-sales areas, people had different metrics. For example, the credit department had a 20% to 25% incentives for their goals on collections, days past due, etc. In addition to the monthly incentive, there was an annual bonus, which depended on net income to all employees.
The most important factors in establishing the plan are: 1- to know your business, your processes, and your people; and 2- to try to get to a formula that works out for what you expect, maintaining everybody motivated towards the objectives. One important caution is to avoid to be dependent on money. Some incentives are non-cash benefits, which sometimes are better than money and less expensive. For example, performing special events to include administrative personnel in the sales cycle, referring new clients. For each new client referred with success, there can be an award (like a star rating) giving the employee the benefit of a special treatment, like a reserved parking lot, a special discount on services, or paid lunch.
There a lot of creative ways to compensate your personnel. Usually, the best answer to your question is in your people and not on an industry benchmark.

We have target bonus percentages, which increase for higher rank employees, and which base the result on a combination of personal performance appraisal results and company results on defined metrics. The relative impact on individual bonuses of the company performance portion increases for higher level employees.

I was revisiting this question because I have run into some morale troubles primarily when we miss targets. If we miss because sales are down admin takes a hit and feels like they can do their part all day long, but if sales are down they don't directly impact that so they lose out on their bonus. Such great comments in here. Thank you all. I'm actually now thinking about changing a metric for them that is tied to the growth of the company but I need to think about what that looks like.