Implementing a Bonus Plan in Your Business (Segment I)

Preface: How do leaders serve their people? They may pay good wages and treat employees with respect. Quote from: John C. Maxwell

Implementing a Bonus Plan in Your Business

Credit: Jacob M. Dietz, CPA

Purpose

Does your company have a variable pay program in place? If not, consider putting one in place to motivate the team to work towards the vision of ownership.

An owner may have goals and a vision, but perhaps employees do not share that vision. A variable pay program that complements the base wage or salary can help align the goals of the team with the owner’s vision. For example, an employee may have various important projects to do, as well as some less important projects to do. Since the employee has limited time, certain work might get neglected. A properly structured plan can motivate employees to do the work that aligns with the owner’s vision.

Goals

Before implementing a variable pay program, consider what you want to accomplish with variable pay. Let’s give the imaginary example of Ironville Car Washing, LLC. Reuben and Justin own the business, and they have two employees. Their business is to go to customers’ homes with a water truck and wash their cars in the driveway. Ironville Car Washing charges per hour for their services. Therefore, if the employees are car washing (billable work), then sales revenue is coming in to Ironville Car Washing, LLC. If the employees are at the shop repairing the water truck (nonbillable work,) then sales revenue is not increasing.

Reuben and Justin realize that to increase their sales, and therefore their profitability, it would be beneficial for their employees to spend more time car washing and less time repairing the truck, getting gas, mending hoses, etc. Reuben and Justin also realize, however, that if nobody gets gas, mends the hoses, or repairs the truck then they would soon go out of business.

Reuben and Justin therefore called a meeting with their accountant to explain the situation. Their accountant, Jonas, ran a calculation of the total hours worked by the employees, and the total billable hours worked by those employees. He calculated their billable percentage to be 80%. Jonas then asked them what the ideal billable percentage would be. After thinking about the details of their business, Reuben and Justin conclude that 90% billable would be acceptable, and that 95% billable would be ideal. Anything above 95% likely would be too high, because that would mean the employees are likely avoiding necessary non-billable work, such as routine maintenance of the equipment.

Next, Jonas asks them what they want to accomplish with a variable pay program. Reuben and Justin explain that they want to incentivize their employees to reach optimal billable percentages, not too high and not too low.

Segment I.

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