CEO: Incentiving and bonus program

pg 158 great game of business


Paying employees:

  1.  Base salary – allows the employee to have job security and they keep their job if they do good work
  2.  Bonus program – If they do a better job  and they continue to improve then the company shares with them whatever additional profit is made.  If the company gorws and makes money, then they do too.
We never want to fire employees or lose jobs. This set up allows you to give employees job security and incentives to grow. They will have the opportunity to earn more. In a down time or tough ecomonic period, maybe bonuses are not given out, but at least they still get base salary, no salary decrease, and job security.


Bonus Program Guidelines

  1.  Everyone participates -Same rules, just different productivity measurement depending on the job
  2. The bonus program is not a competition against your employees,( some win, and some lose) but a competition against your local competition to do it better and increase your revenue more. (the only one how should lose is your competitors) How by working together as a team increases, sales, increase revenue, grows the company, and increases rewards
  3. 1-2 goals. One statistic to measure for each.
    1. Goal should be simple and based on increasing revenue, generating cash, and making money.
    2. The goal should educate them about business
    3. The goal should also make the company stronger by resolving a weakness
  4. Give your employees a chance to win early and often
    1. Winning motivates!
    2. Allow them to win early to trigger motivation, to get on the winning track, and to win again
  5. The health and profit of the company is paramount and comes first
  6. nobody earns a bonus for average work
  7. needs to be clear and quantifiable
  8. Don’t make the bonus program look cheap and that they employee thinks they are getting ripped off
  9. make it possible to earn bonus frequently.  1x a year is not enough.  2x a year is OK, but 1x a quarter is great!
  10. start bonus small and give the employee the opportunity to reach the full bonus in 1 year
  11. Make sure everyone understand the bonus game and give updates to keep people up to date
    1. have an effective system for tracking data and bonus program
    2. communicate results and progress with employees frequently. set a date and time for progress to be annouced each week or month.  They will lokk forward to these updates
      1. it up to you how to communicate:  post them on white board, hold meeting, notices on paychecks, emails, etc
      2. needs to be a continuous flow of information from owner to employees, about what the goals are, current status, resolving any problems, and results
    3. Give opportunities for employees to ask questions and get explanations
  12. the bonus program should be the center of attention of your buinsess. it should provide a context and structure for everything that is going on.  If you choose the right goals, then acheiving them should be everybody’s top priority
  13. The bonus program will be your business management!   It will provide the people of your company a powerful incentive to have a clear understanding of thier roles, and the information required to perform them as well as possible.
  14. Don’t pay the bonus unless it is earned – it is a tool for the putting the employee in touch with the realities of the business and market.  it is not a gift from management but a bonus is a reward to your employees by doing a better job than our competitors!


Bounus program setup

  1.  Calculate by a percentage of gross profit
  2. Have a teared system 5%, 10%, 15%
    1. You want people to move ahead, to take more risks, and to shoulder more additional responsibilities.  if so, then they get rewarded
  3. Companies profit goal for bonuses = 5-10% pre-tax gross company profit.
    1. if the company does not hit pretax profti margin of 5%, bonuses are not given
    2. example:
      1. level 1 5-5.5% pretax profit = level 1 payout 1.3% of salary
      2. level 2 5.6-6.6% = 2.6 of salary payout
      3. level 3 6.6-7.6 = 3.9 of salary
      4. level 4 7.6-8.3 =
      5. level 5  8.3 -9% = caps a 6.5% of salary
    3. calculate what is the highest amount given for bonuses and then work with that money to design your system
  4. The math must work!  Do the math.  An employee cannot make bonus without generating cash to the business!
  5. The bonus “pool” – The total amount of money in the pool of bonuses that can be given out.  start small and allow it to build from month to month and quarter to quarter
    1. POOL = 5-10%
    2. gross profit unearned bonus money in a quarter rolls over to the next quarter
    3. the bonus level and stakes increase throughout the year
    4. example:  Bonus pool for year 1
      1. Q1 bonus pool is 10% of the total year
      2. Q2 bonus pool is 20%
      3. Q3 is 30%
      4. Q4 is 40%
      5. roll over example – if only 1/2 of bonus were reached in Q1, then the 5% left (1/2 of 10% bonus) rolls over to Q2 and now in Q2 there is 25% available of the annual bonus pool.  Say no bonuses were reached in Q2.  Then the 25% rolls over to the 30% in Q3 for 55% of the bonus pool.  If Q3 bonuses are reached then, the employee is happy with the huge bonus and 40% is still left for Q4.  The employee is never let down and disappointed.  They stay in the game
  1. Don’t pay the bonus unless it is earned

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