Mitch Levine and Lee Rust, Corporate Finance Solutions
In many cases, if properly structured, reward or incentive compensation can help a company’s revenues and profits increase. They align the company’s managers’ goals with the company’s owners’ goals and can also be used to keep those managers from leaving for another job. If the incentives are effective, the increase in a manager’s pay makes it difficult for another company to match their total salary and bonus.
It is crucial for you to engineer your company’s growth. However, incentive compensation has a cost in addition to the cash payments to participating managers. No incentive is effective unless it is simple for the person receiving it to comprehend. Furthermore, that individual must be able to calculate his or her progress toward the incentive, as well as the amount of the incentive earned, at any given time.
This necessitates providing each manager with the financial data required to make those calculations. However, you should share your company’s financial statements with all managers who have the ability to influence its financial performance. Don’t hoard the information that your managers can use to identify problems, make corrections and boost profits. In terms of bonuses, you must decide who should participate in addition to the structure and amount. In general, I believe that bonus compensation should be extended to all employees who have a direct impact on a company’s financial performance.
Structure bonuses as annual payments at the highest levels of management. Base a portion of the bonus on the results of the department or function under the manager’s direct supervision and control, as well as a portion on the company’s overall performance. This structure not only rewards the manager for individual performance but it also encourages collaboration with other departments and concern about the overall operations of the company.
Quarterly bonuses may be more appropriate for lower-level managers than annual bonuses. Employees at lower levels of a company are generally best rewarded over shorter periods of time. A foreman may find that a payment made within three months is more effective than a payment made over the course of a year.
Bonus payments for hourly or non-management employees should typically be made monthly and based on a single performance objective. For example, pay a monthly bonus to all hourly employees who exceed a certain level of production per man-hour.
One of my clients, who owns a number of retail stores, now rewards store employees for monthly sales levels that exceed a certain threshold. In each employee’s weekly payroll check, the company calculates the store’s month-to-date sales and issues bonuses. A manufacturing company may post the production level each week on a large sign in the shop to make these lower-level bonuses effective. Each week, shop employees can see if they are on track to reach the bonus level. You can also do it for safety protocol.
If you’re concerned about the cost of such bonuses, keep in mind that if they’re structured properly, the increase in your company’s profits will more than cover the cost of the bonus. In the meantime, think about how you can use bonus plans to boost your company’s profits and enterprise value while rewarding the employees who help you get there.
Mitch Levin and Lee Rust, Corporate Finance Solutions, specializing in mergers and acquisitions, succession planning, strategic planning and financing. For more information, visit www.colfinsol.com or call 888-885-5656.
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