The most successful leaders are those who can get people to do what others can’t. As a business owner or manager, one of your greatest challenges is to get your employees to work harder and smarter. After all, a more effective team will translate into better growth and sustainability for your company. A classic way to motivate behaviour is to provide an incentive – or bonus – for those who help the company reach its targets. While many buy into the idea of creating a generous bonus scheme, some are put off by the cost implications. But ultimately, a well-structured programme will pay off several fold. It all comes down to working closely with your chief financial officer and structuring it right.
Entrepreneur and trainer Brent Halliburton provides some detailed insights into creating a bonus plan that you can afford.
1. Work with your chief financial officer to set a revenue target for the year. Let’s imagine you own an engineering consulting firm and your goal is to hit R10-million in sales.
2. Together with your chief financial officer, set a profit margin target for the year. Let’s take a typical revenue target for a consulting company and aim for R2-million in profits.
3. Decide on an overall bonus portion you would like to award. Generally, your bonus is awarded as a percentage of your total salary cost. Experts generally say you should be awarding at least 10% to elicit the desired response from your employees.
Halliburton puts it this way: “The real question here is how large does the bonus need to be to change behaviour. I think a 25% bonus creates a huge change in behavior. A 10% bonus makes people happy: That is more than a month’s salary! A bonus smaller than 5% does not create big behavioural changes. A bonus smaller than 2% might as well be zero.”
Working on the consulting revenue model, your salary costs will be about 1/3 of your revenue, or R3.3-million rand. If you agree with your chief financial officer to pay out a 15% bonus, that’s 15% of your salary cost, or R495 000 at the end of the year.
4. Work out how much you will need to put aside each month. Carrying on with the example, you’ll need to set aside almost R60 000 per month for the “bonus pool”. This is your starting point.
5. Set a threshold for decreasing the bonus. In other words, if your company undershoots its revenue or its margins, at what point will the bonuses be decreased? Let’s say the company turns over less than R8-million or attains margins of less than 15%, the bonus goes to zero. At the threshold mark, the bonus pool is funded at 5%. Then, Halliburton advises, “draw some lines from there that help you fund the pool with varying amounts between 5% and 15%.”
Set some higher and lower threshold points with your chief financial officer. You might say: If we exceed R12-million in revenue with margins at 25% or greater, the pool becomes funded at 25%. If we exceed R15-million, the pool gets funded at a greater amount, say 35% or 40%. “Typically the idea is that at a certain point, ownership starts splitting incremental profit dollars with employees (maybe 50/50 at peak acceleration),” says Halliburton.
6. Conduct employee reviews. Work with your chief financial officer to determine exactly how the bonuses will be awarded – and then do the hard part: make a call for each employee! Roughly, your top-performing employees should receive about twice their target percentage; the worst performers should receive nothing, and the others should receive something in the middle.
7. Make sure that your bonus programme is achieving what you want. Pat Lynch, president of consulting company Business Alignment Strategies, says the most effective tactic is to target performance. “Some companies give flat bonuses every year. Other companies say it’s a bonus when it’s actually profit sharing or a cost of living adjustment. And, even putting too much emphasis on the company performance as a whole “is not inspiring to workers,” she says. Lynch contends that employees need to clearly know what they must do (something within their control) in order to “earn” a bonus.
Follow these seven steps working alongside your chief financial officer to create a transparent, workable bonus plan that inspires and motivates employees. If you need a full- or part-time CFO to help you do this, contact The Finance Team. Our associates come with the qualifications and experience that will provide the insight you need.