I have written extensively on the topic of performance-based compensation. That work focuses on the technician and office staff. I am being asked more and more about bonus plans for managers. In this article, I will show you how to create a simple plan that is easy to manage and provides protection to the company if financial goals are not met.
Sales Growth Drives Bonuses
We expect our management team to implement the financial plan laid out by the executive staff. This is usually the owner, president, or CEO. If most of the control your managers have is related to creating or managing sales volume, then we will base this plan on meeting our sales growth goals for the year.
Decide on a Bonus Amount and Work Backwards
Decide on how much you would like to bonus your managers if the company does as well as you hope. For now, do not worry about being able to afford these bonuses. Let us say that you have four managers, and you would be happy giving them a bonus equal to a 10% increase in their salary. The only requirement is that your company must meet its sales goals for there to be any bonus.
Create a Budget and Decide on Requirements
Using a budget and other data, decide on your annual sales (aka revenue or income) growth goal for the upcoming year. You may also start this process anytime during the year. We can begin the bonus plan during the start of any quarter. Be sure that your budget considers the cost of these bonuses.
Let us say we have four managers with a salary of $100,000. We will be (hopefully) paying out $40,000 in annual bonuses. We need to add that amount to our budget’s expenses (overhead). We then adjust our sales numbers to overcome the additional $40,000 expense and still generate the net profit we desire.
If we meet our sales goal, the managers get the bonus we anticipated. What happens if we exceed our sales goal? We should consider increasing their bonus by a fixed percentage. In essence, we will give them a portion of our sales increase without jeopardizing net profits.
Gross Profit and Net Profit
Why don’t we base all of this on gross profit or net profit? You could base the plan on either one. Be sure that the managers have control over gross profit or net profit. It is important that they have control over the factors that determine whether they will receive a bonus.
Gross profit is more meaningful than sales, so my preference would be to set this plan up to use gross profit. Adjust the percentages so that the bonus amount works out to be the same.
Create a Written Policy and Procedure
I have included a sample plan below as it would appear in our Operations Manual. Please read it very carefully and make changes as needed.
Management Bonus Plan Policy and Procedure
Let us first cover what annual sales growth percentage is acceptable for our company. The number we select is based on many factors, including our current sales volume, economic conditions, our financial resources, staffing, and the capabilities of our staff.
Classifying Sales Growth Percentages
Our Annual Sales Growth Goal
Our sales goal for 2021 is the same as 2020 plus 22%.
The Bonus Plan
We will pay eligible managers a bonus equal to or greater than 10%, for each quarter where our sales growth was 22% or greater.
Rules and Policies
Example Bonus Scenarios
To make the math easy, let us use a salary of $100,000 that does not change throughout the year.