Setting Up a Bonus Program

In this post, I'll show you how we set up our staff bonus program. My hope is it gives you some ideas you can implement in your business or you can take to your boss as a suggestion.

Most of us have worked at jobs that pay a bonus. Most of the time it seems completely arbitrary. That is no matter what you did you were going to a) Get a bonus or b) Not get a bonus. You would hear a rumor a week or two before bonus time, "yes there is a bonus this year, how much? I don't know."

You wouldn't know why there was a bonus, how you could affect the bonus, why there was no bonus, why was it so low, why was it so high, why did my colleague get more than me, why did they get less than me.

A poorly managed bonus program can create more harm than it intended.

This is how we do bonuses at Coffee Hit.

First, you need to make sure everyone is paid a fair wage. Look at the market place and see what other companies in your location are paying staff for the same or similar work and you need to make sure you're about the same. Everyone knows the easiest way to get a pay rise is to move jobs. You need to know that your staff aren't incentivised to go find a similar job that pays more.

If your an employee then check your job with other companies advertising in the same location and make sure your getting paid market rates. If not advise your boss and give them the opportunity to correct this. This is especially true if you have been in your job for over 2 years.

Ok, so we are paying fair market rates, so now to the bonus. We pay 12% of salary as a bonus. So staff can earn up to 6 weeks of extra income. That's a month and half of extra pay. But the REALLY great thing is they know EXACTLY what they need to do to get 100% of the bonus. Complete transparency.

The other key point is everyone is on the same bonus program. Doesn't matter what level you are. We all work toward our goal as a team. We win and lose as a team.

There are three cool features of our bonus program.

1. The bonus is staggered. That is if we don't hit the top target we have staggered targets where we can earn 4%, 8% or 12% of our pay in bonus. 
2. Bonus is paid quarterly. Annual bonuses are not good. They always seem so far away, it disincentivizes us to reach them. Also what happens if we reach target 4 months early? Tools down? You need to be in the game until the very last day of the bonus program.
3. Bonus is rolled over. If we miss Q1 bonus target completely or only achieve a lower % then the balance is rolled over to the next month. This way we can still achieve 100% of our bonus all the way up to the last day of the financial year! I'll explain more later.

In a previous post, I talked about how we play the Great Game of Business and implemented Open Book Management. So every financial year we identify our Critical Number. One or two things that keep me awake at night and need fixing in the business. Our bonus program is always based on our Critical Number we have identified. Can be sales, gross margin, overhead, cash flow, anything you need to work on in the business for a year.

It's best to set it around financial goals. It needs to be black and white and easily measurable and understood by everyone. Goals like customer satisfaction and quality are too difficult to measure and open to misinterpretation. Financial goals based on the Balance Shett and P&L don't lie. It's there to see.

We have 2 prerequisites for the bonus to be achieved. One is a balance sheet Ratio the other is a net profit level. These two prerequisites mean a) the business can afford it and b) the business has made a profit to sustain a bonus. These are baseline needs for the business to achieve, they are not targets so no need to be higher every year. Our Ratio target is 3, we currently at 6.2 and Net Margin of 13%, currently at 18%. They are not meant to be a barrier to paying bonus just a trigger that if we had a catastrophic year we wouldn't pay bonus even if we had met our target. Saying that the Critical Number target will ultimately affect the 2 prerequisite numbers so achieving Critical Number will invariably mean your Ratio and Net Profit are good too.

Transparency

As I mentioned bonus time can cause more disruption than was intended. That's why a universal bonus system is the only fair way to operate a bonus program. Having clear identifiable and actionable targets tied to the bonus program also allow your self and staff to affect the outcome of the bonus.

Our targets are on a big white board, I break it down to quarterly targets and update the numbers weekly and publish the official quarterly number that our bonus is paid out on.

Also if you don't reach the targets, then don't pay the bonus. It can be hard especially if you just miss out. But a target is there for a reason. As long you can say you and the staff did everything to achieve the target but missed then you need to take the tough decision not to pay.

Quarterly Payouts and Setting Targets

This in itself is huge. Just breaking the bonus down to quarterly payouts massively incentives everyone. 3 months isn't that far away. Then Bonus Time!

Ill go through our current bonus program to give you an idea of setting targets and quarterly payouts.

Our target this year is to grow sales by 15%. We had a poor year in sales last year, sales were down 10%, our old website launched and we had major problems. So this year with our brand new website we all agreed we wanted to get those sales back, we all agreed that growing sales was our target for this financial year and we agreed 15% was an achievable goal if we worked hard.

So our top target to achieve the full 12% payout was 15% growth in sales. We call this our Super Green target. I then set 2 lower targets that whilst not our main target, if we achieved we would recognise that we had come close and still had a pretty good year. These we call Yellow and Green. Yellow was set at 13.5% and Green at 14.3%.

I then broke these down to quarterly targets, With Yellow, Green and Super Green levels. So Q1 Super Green target was 5%, Q2 was 7.5%, Q3 was 10% and of course, Q4 was 15%. Yellow triggers a payout of 4%, Green of 8% and Super Green the full 12% of pay bonus.

Below is an image of our current bonus plan with quarterly targets and payouts.

So as you can see as we go through the year the bonus levels get closer to our annual target. But the great bit is if we miss a quarterly payout it rolls over! So say we miss the Q1 target of 10%, then in Q2 the game is now for 30% of the bonus (Q1's 10% and Q2's 20%), then if we miss all Q1, Q2 and Q3 targets, we are playing for 100% of the bonus in Q4!! Then we only pay after the financial year has ended and our accounts have been reconciled and verified. So everyone is in the game right up until the last day of the year. 

In above our Q1 was the end of May. Our sales had grown 11.14% over the same period last year, so we achieved our Super Green target and paid 10% of the bonus.

Conclusion

Hopefully, you can see bonuses can be fun and rewarding for both the staff and the business. If your bonus program doesn't look like the above then I highly recommend you spend some time implementing it in your business or presenting it to your boss as a suggestion. If you want to read much more detail then I suggest getting the book Great Game of Business by Jack Stack.

Best Wishes, Paul Radin

See previous posts