637: Motivational Bonus and Incentive Examples

If you have ever been interested to see a group of business owners conduct a communal eye roll, bring up the topic of bonus and incentives. A few years ago we had a client who decided to reward their team from a banner year and forego distributing a substantial six-figure margin to himself and his partner.  There was no expectation created for this one-off distribution.   It was a $200,000 sum that would be distributed to around 25 employees… you can do the math.  Not bad.   The response? Crickets.   Of the 25 employees, there was a thoughtful “thank you” from three, a casual “thank you” from a few more, and crickets from everyone else. To add insult to unexpected injury, the next day an employee came in and confessed, “I just got a job offer to go make $10k more per year and I don’t know what to do…” Candidly, when calculating an employee's compensation, most owners in businesses with less than 50 employees have not considered the additional investment of bonus or incentive outlays.  When the thought finally arrives the plan is usually built from a position of fear rather than a position of joy, celebration, and sharing.   In other words, “What can I do to make these employees feel more valued so they don’t leave!” Most owners wish to generously share in some of the margin that has been created over and above what has been budgeted for base compensation and commission. There is a chasm that exists that almost renders any over-and-above distribution as challenging at best, frustrating, and divisive at worst. Owners are forced to think of the business finances in terms of the net…what is left over after all responsibilities are payed out. Employees are often time locked in on the gross… the big numbers that come in at the top or total sales.   An employee can do math in their head and determine the total sales of either their efforts, or the total sales of the company and think, “Well, look how much I generated for the business, and all I get is my base with a little extra (or sometimes no extra at all).” The owner looks at the math spelled out on the profit and loss statement, the cash balances in the bank account, and the budget of projected expenses and revenues for the coming year and thinks, “How in the world can we afford to pay out any additional and not be cash-strapped for the future?” It is a silent stalemate between owners and employees, top line and bottom line, perceptions, and expectations.   How can employees see additional compensation as motivation and incentive, instead of seeing it as an expectation? How can owners see additional compensation as a budgeted item to be shared and joyfully extended, instead of seeing it as a fear-motivated mortgage that taxes future growth opportunities (remember, marginal cash is the prime fuel for future growth).   Most owners desire and have motivation to extend extra-compensation to reward over-and-above effort and to show additional appreciation. There are however three primary negative motivations for the build-out and deployment of these plans that usually result in a lack of health and longevity.  Owner guilt is where the owner feels unwarranted guilt for having access to the net income of the business while employees do not.   What is often missed during boom times is that the owner must use a portion of the net to stack in reserves for when the business has negative net income and wants to continue employing personnel even though the business cannot “afford” it in a particular month of the year. Another negative motivation for deployment of extra-compensation plans is an owner’s fear that an employee will leave.  It is a crucial principle that all businesses be built to weather a valuable team member leaving the roster.  A business will never be bulletproof from the handicap of losing great talent… but it can be prepared on how to respond.   Businesses must be cautious about being held hostage by one highly valuable employee; it can damage morale and cash-strap a small business for future opportunities. A final negative motivation for extra-compensation plans are employee demands in a vacuum of understanding the full scope of the business finances.    Financial literacy in a business is key to building consensus and understanding around incentive compensation and bonuses.  A two step approach will aid employees in understanding the basics of business finances. The first of the two steps to financial literacy is communicating with all employees that a dollar is not a dollar because… A dollar out is always more than a dollar (think when you pay for a sandwich that costs $9.95…you will pay more than $9.95 with taxes, tip, delivery, time spent, etc.) A dollar in is always less than a dollar (think when you receive a payment for $9.95…you will send the majority of that $9.95 to other people before you get to keep what is left over) The second of the two steps to financial literacy is communicating with all employees that business finances are reviewed in a past, present, and future tense.   The profit and loss statements and balance sheets reveal what has happened (past). The subdivided bank accounts and level two dashboards reveal what is happening (present). Simple budgets and pro formas give insight into what will happen in the future assuming the inputs hold true (future).   Reminding employees that a significant part of financial literacy is assuming what may happen (future) and so not all hoped-for elements of compensation can be guaranteed.   Communication of preparation, purpose and payout are the three priorities of creating an incentives program that can yield the hoped for results (notice the use of “can” and not “will”...there will continually be volatility around this issue). First, in communicating purpose, it is helpful to understand what these programs exist for. What is a bonus?  Without being punchy or rude, a bonus is simply a bonus, a cherry on top, an unexpected treat, and added benefit that displays generosity.  That’s it. Bonuses should never be extended for baseline job role responsibilities, for showing up regularly and on time.   It is not uncommon to overhear someone say, “Well, I’ve been here for 12 years, I should get…” You have been compensated fairly and regularly for 12 years, that is what you have received.  A bonus is undeserved extra.  No one should ever… ever expect a bonus and should never base any portion of their personal budget on an anticipated bonus.   A bonus is a bonus.    The purpose of incentive programs is to incite (same root) an action.  Most compensation opportunities above base should have the spirit of an incentive compensation in contrast to bonus or “profit sharing” (btw, profit sharing can be a dangerous term, and in some states place the business in a vulnerable legal positon).  What is the business trying to incite, to encourage, to stir up in addition to the baseline job roles and responsibilities?   Incentive compensation carries an over-and-above idea of performance over-and-above the base job role.   There are multiple ways to structure incentive compensation plans that all yield various outcomes.   A few structures of notable mention are… A simple lump sum based on a percentage of an employees base salary based on hitting target profit Top line percentage of sales based on total volume Bottom line percentage of sales based on net income per sale after job costing Monthly or quarterly target incentives based on sales, or other measurable activities  Regardless of the structure you decide, there are a few crucial questions to ask as you prepare for an incentive structure. What will be incentivized? How will it be tracked? What flexibility does the program have to adjust if it is counterproductive either to the team or to the business?  How will the incentive dollars be set aside to ensure profitable payout? (i.e. subdivided bank account?) When and how will it be paid out? How will it be well-communicated when it is paid out to achieve the desired outcome? Every incentive payout should come with added communication both the celebrate the payout and to add a subtle reminder that this is over-and-above and you should cautiously budget your life based on this pay out.  One final thought, all incentive structures should be considered to be subject to change at any time, and at least reviewed and updated annually.  You are not required to be held hostage by a bad incentive compensation structure…it will not only ruin the business, but ruin opportunities for each employee.  Don’t allow the benefit of one to backfire and cause the detriment of many.   Incentive structures can be a value add to a business and to a team IF it is well-communicated, held with open hands to adjust over time, and generously given and received.