The response to last month’s newsletter about the per job bonus program was tremendous. The newsletter touched upon a hot topic as I heard from many contractors that were experiencing the same problems with their per job bonus programs that I described. This newsletter will describe a proven bonus plan alternative to the per job bonus program. In fact, this proven alternative is more than just a bonus plan.
Any bonus program should be designed around a set of objectives which you hope to accomplish. My belief is that the bonus program should encourage employees to be more productive, thereby making the company more profitable and competitive. Consequently, the bonus plan should be based on what they have most control over, which is direct and indirect job costs.
The vast majority of the bonus plans that we design are based on the attainment of an annual gross margin contribution goal that will enable the company to pay for the overhead and have enough profits left over to fund the bonus plan, owner distributions, tax liabilities, and equity growth of the company. Gross margin contribution is defined as:
– Direct Job Costs
– Indirect Job Costs
= Gross Margin Contribution
Gross Margin Contribution
– Overhead Costs
= Net Profits
Since most employees do not have any control of the overhead, what is the benefit of designing a plan on the bottom line? From the field employees’ point of view, none. They often don’t trust the overhead numbers and most always believe that there is too much office overhead anyway. However, the gross margin goal needs to be high enough to protect the company’s profitability.
As in the previous newsletter about the per job bonus plan, we will outline the Pros and Cons of this proven alternative.
1. It represents a change from the norm. Some employees and owners naturally resist any change.
2. The time frame is usually annual which could result in a longer payout period than what has been customary.
3. It requires the company to share information (sales, job cost info, and gross margin contribution) on a consistent basis-information that the owner may not have shared in the past.
4. It emphasizes team goals ahead of personal goals, which some employees may not like if they are used to the per job bonus plan. (A PRO from an employer standpoint)
5. Employees become responsible for all the job costs-not just labor costs. (Another Pro from an employer standpoint.)
1. It protects the profitability of the company. The company will have the ability to pay the bonuses without jeopardizing its long-term financial stability. If the gross margin goal is not met, there is no bonus distribution.
2. This bonus program requires an open environment by sharing information that the employees influence and appeals to the human motivators of recognition, sense of achievement, sense of belonging to a group, peer approval, and financial security.
3. Performance numbers are routinely and openly shared so that there is a connection between personal and job performance to the attainment of the goals.
4. All employees share in the same team goal. Teamwork and team spirit are encouraged. There is a better opportunity for all to be on the same page.
5. The potential rewards are defined and known ahead of time. “What’s in it for me?” is answered ahead of time.
6. The customized distribution methods recognize both team and personal contributions toward reaching the goals.
7. It minimizes many of the unfairness issues that crop up from job-by-job plans as it is team-based.
8. All eligible participants have an opportunity to earn a bonus if the team reaches its goal.
9. Conditions of the plan discourage unsafe work practices and poor quality. Other conditions are customized per client preferences.
10. It is by far most fair to both the employees and the company.
1. From a business standpoint, it adds discipline and causes better business planning.
a. It is driven by an annual forecast for new orders, sales, gross margin contribution, overhead budgets, and net profits.
b. The annual forecast is broken down into monthly targets.
c. The forecast enables the company to determine the true recovery rates for indirect costs and overhead expenses so that the true break-even pointis established for each bid.
d. Creates a more forward-looking environment as departments strive to meet or exceed the planned goals.
2. From a project management standpoint, it adds discipline and accountability.
a. Requires monthly margin reviews to project the estimated final costs of all non-closed jobs.
b. Active job costing creates a more forward-thinking environment, which reinforces the value of pre-planning. (See previous newsletter about job costing).
c. Margin reviews provide accounting with more accurate information for WIP statements and income statements.
3. From a financial standpoint, income statements become an operating tool and reflect the methods of forecasting.
a. Direct and indirect costs may be redefined.
b. Indirect costs are defined as those costs influenced by field operations but typically not captured through job costing. Examples include:
i. Warehouse support (labor, supplies…)
ii. Vehicle expenses (ownership, fuel, maintenance, insurance…)
iii. Small tools
vi. Inventory shrinkage
c. Financial statements must be generated timely each month.
d. Variances to planned goals are identified.
e. A monthly financial planning meeting will show the results of the last month along with a 3 month look ahead by projecting out existing sales and gross margin backlogs and updating the new orders forecast by sales/estimating.
4. From an estimating/selling standpoint, accountability is strengthened, as each Estimator/Salesperson will have monthly goals for the amount of new gross margin from contract awards he/she is to bring into the company.
a. It will become quite apparent that shortfalls in new orders will affect future sales and future gross margin contribution.
Absolutely. With proper commitment from the management team, this proven alternative will create a more goal-oriented environment. Business won’t just happen. It will be created and driven by those who can most affect it by establishing those benchmarks from which to measure performance and with a predefined reward for reaching or exceeding the team’s potential.
NOW is the time to take control of your business. Build a better bottom line NOW. Create exceptional team spirit NOW. Call Doug Phelps NOW, at 215.882.2963. Or email us dphelps@TheJustRewardsPlan.com .