Preface: “Keep God first, chase your dreams, and everything will pay off.” Quote from Jacob Latimore
Implementing a Bonus Plan in Your Business (Segment II)
Credit: Jacob M. Dietz, CPA
Now that their accountant Jonas understands what they wish to accomplish, he begins drafting a bonus plan with them.
Here are some questions they go over:
- Who is eligible for the variable pay program?
- How frequently should the bonus be paid?
- What triggers the bonus?
- How much should the bonus be?
They discuss who should be eligible for the plan. They decide that all full-time (40 hours or more per week) employees will be eligible for the plan. In the specific situation of Ironville Car Washing, LLC, the part-time employees spend vary little time that is non-billable. Reuben and Justin will just make sure they pay a fair and competitive wage to the part-timers, and they will avoid the hassle of including them in the bonus program.
Next, they discuss how frequently the bonus should be paid. Immediately they agree that once or twice a year is not frequent enough for their company. Too much time would pass from when the employees do the work until they get the bonus. They agree that such an infrequent bonus would do little to incentivize the employees.
They agree that a monthly bonus would likely be effective for their employees, but they are not sure how much work it will be to calculate it. They think that a quarterly bonus would still incentivize the employees, although not quite as much. A quarterly bonus would be less of an administrative burden since they could calculate it less frequently than monthly. They therefore decide to implement a quarterly bonus.
Next, they discuss what should trigger the bonus. They realize that a 90% billable rate is good, and that 95% is ideal. They also recognize that their workforce is only at 80% billable, currently. To avoid demoralizing and failing to incentivize the workforce with an unattainable goal, they decide the trigger should be set at 85%. If an employee is 85% billable, then they receive a bonus. The bonus increases with the billable percentage, up to 95% billable. If the employee exceeds 95% billable, no increase above the 95% billable increase is given because the company believes above 95% billable is not helpful to the company in the long run.
Next comes the work of deciding how much the bonus should be. This process takes some judgment. If the bonus is too low, it might fail to incentivize the employees to perform. On the other hand, they do not want it to be so high that the employees rely on the bonus for living expenses.
After the meeting is over, Jonas sits down with the Eagle Business Software file that Ironville Car Washing, LLC uses to record their financial transactions. Jonas considers the working capital of the company, their profit margins on jobs, their labor rate, their labor percentage, benchmark labor percentage data, and comes up with some options for Reuben and Justin to use to calculate the bonus. Jonas recommends that they use from 3% to 5% of the quarter’s base wages as the bonus. Reuben and Justin discuss the numbers and agree with using 3% to 5%.
The brief silence following the agreement is interrupted by the office phone. Reuben and Justin are urgently needed at a job site to help soothe a customer upset by a flooded lawn, so Jonas agrees to write up the bonus plan for them.
In the bonus plan document, he explains that the full-time employees will be eligible for a bonus after the quarter is over. If an employee is 85-89% billable, then they get a bonus equal to 3% of their regular and overtime pay in the last quarter. If an employee is 90-94% billable, then they get a bonus equal to 4% of their regular and overtime pay in the last quarter. If an employee is 95% billable, then they get a bonus equal to 5% of their regular and overtime pay in the last quarter.
- 85-89% Billable = 3% bonus
- 90-94% Billable = 4% bonus
- 95% Billable = 5% bonus
After reviewing and approving the bonus document, Reuben and Justin send it to their attorney at Jonas’ advice to make sure it does not violate any labor laws.