Bonus Plan Characteristics
Bonus Plan Elements
The Plan should exhibit 6 characteristics • Timely • Significant • Equitable/Fair • Predictable • Consistent • Relevant to Enterprise Value Creation
Bonus Plan Elements
• Timely
– Short term goals easier to measure and more likely to get near term attention from bonus plan participants – Allows board/CEO to adjust targets quickly – important factor in this fast paced environment – Gives team multiple chances to win during the year – Avoids lengthy idleness when bonus won’t be acheived – Paid out shortly after period ends (4 to 6 weeks)
Bonus Plan Elements
• Significant
– Meaningful enough to motivate behavior – Generally in range of 20% to 50% in larger companies
Bonus Plan Elements
• Fair/Equitable
– Salary is for delivering expected results. Bonus is for achievement above expectations
• Bonus can used to highlight the importance of a particular goal or two
– Should be linked to objectives that each bonus plan participant can influence – Ensure progress can be measured within the bonus period
• Necessitates segmenting long duration objectives like signing a big partnership
– Capped at some percentage of salary? – Some allowance for hitting 90% of target?
Bonus Plan Elements
• Predictable
– Allows participant to link an objective to a specific $ reward – Easily understood by the plan participants and the CFO. We don’t want to be surprised by the payout – Avoid subjectivity in whether the objective was achieved – Ease of calculation eliminates discussion/haggling over bonus amount due – Complexity is the enemy
Bonus Plan Elements
• Consistent Methodology
– Employees want to learn how the program works once. Don’t want to re-learn each bonus period – Start out with simple construct to ensure big changes are not required down the road. This will increase sense of fairness of the program – Changes in plan are often seen as “takeaways”. We want to minimize these
Bonus Plan Elements
• Relevant to Enterprise Value Creation
– Establish important objectives each period – Tied to things that matter to the building of a successful company
• i.e. sales, margins, recruiting, retention, product quality, customer satisfaction • Early on, revenue should account for 2/3 or greater of the bonus. % can be ratcheted down over time
– This is the most time consuming aspect of the program
• Heavy involvement by the CEO/comp committee in establishing goals each period and reviewing previous quarter results
Participants?
• Start out with Executive Team
– Excluding VP Sales (already has a commission plan
• Consider adding Directors to the bonus plan once company achieves break-even • Company wide rollout possible when it is consistently profitable
Quarterly Bonus Plan Straw Man
• Timely • Significant • Equitable • • • Quarterly objectives 25% of Quarterly Salary CEO to determine what is achievable
• Predictable
•
Argues for simplicity this quarter
Q4 Bonus Plan Straw Man
• Consistent • Start with a few objective goals (can add more later)
• Relevant to Value Creation
• Sales/Margins should be heavily weighted. Will send loud message of the importance of these accomplishments