Bonuses: Keys to Getting Them Right

The right bonus structure can help you attract and retain talent in today's brutal war for talent.

authors David Lupberger | July 12, 2021

In this robust remodeling market, there is simply more work than good employees to do the work. Across the country, employers are struggling to find and keep good employees while working within the company budgets that have gone with sold projects. Good employees are at risk of being “poached” and this poaching is taking place every day. To keep these good employees, let’s review the basics of a successful bonus plan so that if your company does well financially, these good employees can be rewarded for their work.

I got the benefit of reading an article from MPN Inc., an exit-planning company located in San Antonio. The title of the article is 8 Reasons Why Most Bonus Plans Fail…. and how to do it Right. I want to take some key points from this article and apply these key points to the remodeling industry.

Let’s consider a single success definition for a bonus arrangement that all plans should meet: Reinforce a partnership relationship with employees by sharing financial value with those who help create it.

Creating this partnership is crucial to a successful bonus arrangement. It can not be manipulative and must eliminate any sense of entitlement. Here are four key points to establishing a clear and fair bonus alignment between employer and employee:

  1. Avoid manipulation of employee behavior
  2. Eliminate a sense of entitlement among employees
  3. Stimulate innovation, ownership and stewardship
  4. Create alignment of purpose and outcomes among all parties

This article suggests a change in terminology. The article suggests changing the term “bonus plan” and substitute that with a “value-sharing plan” (VSP). “You’ll get your best results if you (a) teach and (b) trust! Teach your team members what it means to create value for the organization (by doing what is meaningful for your customers). Then trust them to do the right things”.

To begin, you will want to create a meaningful VSP pool that is tied to your actual annual company budget. This is the revenue “target” that value-sharing must exceed. What is your breakeven budget after all cost of goods sold, company overhead, and owner’s compensation?  On average, you should expect to hit your budget and pay at or near the target pool in three out of five years.

One of the best examples of what it means to create company-wide value is expressed in the Nordstrom’s department stores’ five Core Values:

  • Customer Obsessed: We strive to know our customers better than anyone else. We listen, anticipate, build trust and move with speed to deliver on their needs. We make customers feel good!
  • Owners at Heart: We treat every interaction as an opportunity to make an impact and deliver excellence. We collect the right input, we are empowered to use good judgement, we own our decisions and keep it simple. We leave it better than we found it.
  • Curious and Ever-Changing: We approach problems with curiosity and create solutions. We unlock potential to be bold, think big, and inspire innovation. We disrupt the status quo to solve customer needs in new and relevant ways.
  • Here to Win: We’re committed to delivering results, both today and tomorrow. We win as a team by supporting and challenging one another to be better every day.
  • We Extend Ourselves: We treat each other with respect and kindness. We create a welcome environment helping people feel connected, valued, and part of the community.

At Nordstrom, an employee will not face disciplinary action if they act in the best interest of the customer. Nordstrom wants to empower their employees to make these decisions. The company is well-known for exceptional customer service. That is an expressed company core-value.

Let us relate this to the remodeling industry. There are three legs in any successful remodeling company:

  • Sales
  • Production
  • Administration

Let us see if we can create the basis of a successful value-sharing plan for each department.

Sales

Sales should be the easier value-sharing plan to complete. Good salespeople are paid on a commission basis. Their job is to sell profitable jobs. You must have the basis for outlining the parameters of a successful sale that is not just based on the project sales price, but on company profitability. The formula for a profitable sale should be part of the sales commission structure. With that in place, let good salespeople do their job.

I am always a little amused when one of my consulting clients tell me that their best salesperson made more in annual compensation the previous year than they did as an owner. If they are selling profitable work, I tell them “Congratulations!” That is a salesperson that you want to reward.

Production

Creating production-based value-sharing is a little more complicated, but I will try to give a simple definition. The basis for production bonuses can be based on the following:

  • On-time
  • On budget
  • Happy client

My context here is that production can be rewarded if they complete a project on-time, have a happy client, and that they have “beat the budget so that there is a “surplus” in the budget based on actual job costs. To do this, production must know and agree to the production schedule, and have reviewed and agreed to the project budget (not including company overhead). For example, if a project is completed on time, with a happy client, and there is a $10,000 surplus in the labor budget, a fair value-sharing plan could be to split that surplus 50/50, with $5,000 going to the company, and the remaining $5,000 to be split between the production team. There are some key points here:

  • As not all projects are completed with a surplus, this value-sharing might be done on a semi-annual basis where an aggregate total is created for a profit-sharing plan.
  • Due to project expertise and experience, the allocation of profit-sharing profits with the production team should be delegated to the production manager. There can be a sliding-scale based on experience and existing compensation.

Administration

It is a team effort and administration should also be eligible for company profit-sharing. This is where your annual company budget comes into play. As administration is usually part of company overhead, you need to begin to determine what value-sharing can take place with administrative staff. To do this, go back to your annual company breakeven budget. If the administrative staff knows what that breakeven budget is (after all cost of goods-sold, company overhead, and all employee compensation), they have the basis for beginning to understand that company net profit over that breakeven budget amount can be the basis for profit-sharing. There can be an aggregate total that can be reviewed on a semi-annual basis to review potential administrative bonuses. It will not happen every year, but it is a basis for a shared plan.

Conclusion

An effective value-sharing plan comes down to three key points:

  1. Clear goals: Remember the universal goal – reinforce a partnership relationship with employees by sharing financial value with those who help create it.
  • Specific standards:
    • It should be clear.
    • It should be believable.
    • It should be meaningful.
  • Clear communication: This is arguably the most critical part of your program. It is impossible to over-communicate your plan to your team members. Educate them. Inform them. Reinforce plan values. Share the future, not just the past. Help them gain clarity. Show them how the results can be achieved. Help them understand how meaningful the company values can be. Remind them of your trust and commitment to them. And if the plan needs to change, amend it. That is how this works!

Like the Nordstrom’s example above, treat your key employees like non-equity partners. QR

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