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Incentives, Bonuses and Profits

Mar 30th, 2012 | By | Category: Nick Kemper's Blog

One thing we do a lot in management is look at the numbers.

What’s the revenue this month?

What are our expenses?

What’s our labor percentage?

How’s the cash flow?

And, of course, the bottom line: What’s our profit?

I’m a big believer in incentive programs. One of our good customers shared with me an idea that he uses at his vehicle auction. He gives away a couple of cash prizes via drawings at the auction — one you qualify for by registering, the other you qualify for by paying in cash for your purchased vehicle that day. It really helps his cash flow because more people pay for their purchase right away for a chance to win the prize.

I like the idea of threshold bonuses for certain employees, especially commission salespeople and drivers. One owner I worked for implemented a program for his sales staff. He set a call volume goal and if we hit it two months in a row, each salesperson (there were two at the time) would get a cash bonus and the sales manager would get a bigger cash bonus — which I liked because I was the sales manager. Then the goal would increase, and we’d be eligible again for a bonus when we hit that goal two months in a row. The bonuses were big, so it was a very effective incentive, but if call volume increased that much for two consecutive months, the resulting increase in profit would more than cover the bonuses, so it was a win for everyone.

I always wanted to do something like that for our drivers, such as, if they hit a certain dollar amount for their commission for any month, their commission percentage would increase for that month, making their commission even higher. This would have worked great for those drivers that needed a little extra push to motivate them when they were having a good month. I could never get it approved, however.

At one company I worked for, the owner announced that all of the employees would be eligible for a profit bonus. If the company hit a certain net profit percentage, then 10 percent of the profit would be paid out to the employees, divided up according to position and seniority. The first year we fell short by quite a bit, but we were profitable. The second year we did better, but we still missed it, though not by much.

Now, you have to be careful about these kinds of programs because when everyone has a stake in the profit, certain decisions are scrutinized more closely. For instance, our company owner, who was a collector of military items, made a large purchase of a particular piece of military equipment and it was paid for by the company, so it cut into our profit quite a bit. It wasn’t enough to make the difference between the employees qualifying for the profit bonus and not qualifying, but there were grumblings. It definitely hurt morale. You could have argued that the item was a unique marketing tool, but you would have had a hard time convincing the employees that there was a positive return on investment. Like I said, it didn’t make the difference, but you don’t want people focusing on something like that as, say, focusing on their own performance, which did have a direct effect on profit. This type of a program has to be carefully managed.

The year after that, we didn’t do so well, which started an annual tradition of our owner standing up at the company Christmas party and blaming decreased business on 9/11, which he did until about 2004. He dropped the profit bonus program only three years after starting it, during none of which did we earn it, and then that had a negative affect on morale.

My stance, after the first year, was that a profit bonus should be given if there was any profit at all, but that the percentage increased as the profit percentage increased. So, for instance, if there was any profit at all, the employees would get five percent of it divided up among all as a bonus. If profit hit, say, eight percent, that percentage would increase to 10 percent. And then if it hit 12 percent, then the bonus percentage would go to 15 percent. And so on. The way it was set up, with a threshold that may have been too high, it seemed to some of the employees to be like a set-up. We would all work hard to get profit up, and then if we fell even a dollar short, all of it, including all the extra profit we generated with our extra effort, would go to the owner. It turned out to be a slippery slope, that’s for sure. I could see, after that first year, that it wasn’t going the way any of us wanted it to go. And it spiraled downhill from there.

There are a lot of arguments against profit-sharing, such as, “Employees don’t share in the risk, or pay for losses if we lose money, so why should they get a share of the profits?” Regardless of how you think it should be, the bottom line is this: If sharing the profit results in more net income for you, the owner, how is it a bad deal for anyone?

Les Schwab, a man who built a network of very successful tire centers here in Oregon, wrote a book titled Pride in Performance: Keep It Going. I encourage all of you business owners out there to read it, and to see how this man built an incredibly profitable business by sharing the profit with his employees.

Have a safe and profitable week.

Nick Kemper