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Is Your Bonus Program Ineffective?

'Bonuses Should Be a Stretch, But Not Impossible to Achieve'

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A bonus "is not a ''set it and forget it' type of concept," says McCarron.

| Photo Credit: MTD

As you begin a fresh new year, considerable thought should be given to revising your company’s bonus program. While a one-size-fits-all approach isn’t appropriate, there are some choices that can help you maintain - and if applicable, revive - employee interest.

Let’s tackle the big issue first. Bonus programs require a start time and an end time. A bonus - sometimes called an incentive plan - is not a “set it and forget it” type of concept.

Human behavior studies have proven that if an incentive program goes on indefinitely, people lose interest. What’s worse, if you find that the program after too long a period isn’t producing results and you decide to end it, employee behavior worsens.

This is known as entitlement. You took something away that wasn’t working anymore, but employees relied on the incremental income stream. 

Now you’re the bad guy!

Rip off that bandage if you have an ineffective bonus program and start fresh. If you have technician or hourly salespeople bonus programs, it’s best to use a monthly or quarterly timeframe to begin and end.

For management bonuses, longer periods of six months to a year - you can pay portions along the way - is better. So every quarter, the sales and production bonus focus changes and every half or full year, the management bonus focus is modified. 

The structure of your bonus program should fall into just a few categories. For sales and technicians, it’s usually a small dollar amount for specific items sold or recommended. The item should be fairly common, yet underperforming in your store, as well as highly profitable, like an alignment or air filter.   

End times are critical here, as many owners get caught in the trap of increasing the payout when performance slows. For example, an owner wishes to pay $1 for every alignment sold. In the first month, the store sells 90 alignments. In the fifth  month, the store is back down to 30 alignments, so the owner “ups the ante” to $2.  

This may revive interest, but the cost of the program just doubled.

Sometimes an owner may pay $10 per alignment, but employees have zero excitement around the program.

Store manager bonus programs usually are net profit-based. One of the most common is 10% of net. It seems pretty simple and it is widely in use, but let’s shine a light on its biggest flaw - store managers don’t control most fixed expenses. This creates an eventual mistrust of whether the net profit line is a “real” number, as many managers say.

There is an alternative - a gross profit   minus payroll bonus program. The most control a store manager has over profitability falls into what gets sold, for how much and who got paid to do it. If a store manager is really good at motivating his people to sell items at the proper amount, but allows for a ton of overtime, it’s all a giant waste of time.

This kind of bonus allows for nearly clear transparency, is easy to calculate on an ongoing basis and the manager has near complete control of the levers that build the payout.

The big benefit of this program is trust. A net profit bonus has to wait a few days or a week after the close of the month to be calculated. A typical store manager doesn’t really understand rent factors or where advertising dollars are spent.

But a gross profit minus payroll bonus can be calculated on a weekly basis, so the manager knows what’s going on with his bonus the whole month.

What percentage should you pay? Each store is going to be a little different. A store that sells a lot of tires, but not much service, will have a lower dollar amount to apply and vice versa.

The simplest way to start off is to take what was paid out last year and reverse the math. If you paid your store manager $24,000 in performance bonus over the full year, look at gross profit minus payroll numbers.

What percentage is $24,000 of that?

The idea isn’t to pay managers less or create a program that is so lucrative to the employee that you have to stop it midway through because it’s bankrupting you. The idea is to create a transparent program the employees trust, can calculate on their own at any given point and gets reliably shaken up every so often to renew interest.

And for managers, every year the program should be tweaked — a small added payout to tires, a small added payout to payroll control — whatever the company needs to be more successful.

Bonuses should be a stretch, but not impossible to achieve. If a bonus is too easy to achieve, it becomes an entitlement. If it’s too hard, it becomes an anchor on motivation.

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