The Great Game of Business – Chapter 7 section 2 (part 12 of 17)

If bonus programs are so great, why do so many of them fail?

 We’ve come up with a checklist of what you should do, and what you should avoid, when you create your own bonus plan.

  • Put everybody in the Same Boat

Every employee should be part of the same bonus program, from the chief executive to the people who sweep the floors and answer the phones. Give everybody the same goals and similar stake in the outcome. At SRC, we calculate bonuses as a percentage of regular compensation. Whenever a bonus is paid under Stop-Gooter, each of us gets a check for an amount representing a preset percentage of our annual pay (salary, or wages plus overtime).

We don’t all get the samepercentage, however. Under Stop-Gooter, most managers and professionals are eligible to earn bonuses totaling up to 18 percent of their annual pay. For everyone else, the maximum bonus is 13 percent of annual pay. The reason is simple: we want people to move ahead, to take more risks, and to shoulder additional responsibilities. If they do, it’s important that they get rewarded. But, that said, we want everyone to go after to same goals and be subject to the same rules.

That’s because we want people to play together as a team, to pull in the same direction. It’s easier to win that way. We don’t want people or departments to compete against one another. We don’t want to set up squads that try to beat one another. We certainly don’t want to pit managers against workers, or vice versa. We want a compensation system that encourages people to understand one another’s problems, that gets them to work things out. We want people to see how much we all depend on each other, regardless of where we stand in the company. At SRC, you win when everybody wins, when the company wins. I don’t want a company-wide bonus program in which some people win and others lose. The only ones who lose should be our competitors.

  • Stick to Two or Three Goals – and Get Them from the Financials

Giving people a long list of goals is like not having any goals at all. Build your bonus program around two or, at most, three goals per year. … I want goals that keep people focused on the fundamentals of business: making money and generating cash. I also want goals that educate people about the different aspects of the business, that teach people exactly what it takes to be successful, and that provide an incentive to do the right things. Finally, I want goals that make the company stronger by eliminating our weaknesses. As it turns out, you can get all that by choosing your goals off the financial statements.

We almost always base one of our annual goals on pre-tax profit margins – ensure people stay focused on making money. The other goal has varied from year to year, depending on what we’ve seen as our biggest vulnerability at the time. As a general rule, however, we make a point of taking the second goal off the Balance Sheet – to make sure people also pay attention to generating cash. (I’ll talk more about the process we use to select goals in the next chapter, “Coming Up with the Game Plan.”)

Now a funny thing happens when you choose goals from the financial statements. For every one you pick, you get about five or six others at the same time. … So the bonus game takes people down the money trail, and they see everything that happens when customers are slow in paying their bills. They get an education in business, numbers, and the accounting system. They learn how it all fits together. And they accomplish several goals in the course of going after one.

  • Give People the Chance to Win Early and Often

A bonus program is first and foremost a tool for motivating people. If it doesn’t motivate, it isn’t working. And what gets people motivated? Winning. … Set up your bonus program so that you put people on a winning track from the outset and then make it possible for them to keep winning right through the end of the year.

That’s the whole logic behind our system of payouts. After we choose a goal, we set the levels at which we will pay bonuses. There may be as many as five payout levels for each goal. With the profit goal, for example, the company’s baseline is usually a pretax margin of 5.0 percent, while our top target is 8.6 percent. If we come in with a pretax profit margin below 5.0 percent, we don’t’ earn any bonuses. If it’s between 5.0 and 5.5 percent, we get into the first payout level, which pays hourly people bonuses equal to 1.3 percent of their regular pay. We hit the second level at ta pretax margin of 5.6 percent, and the bonus rises to 2.6 percent. The third level starts at a pretax margin of 6.6 percent, and pays 3.9 percent of regular pay. So it goes until the company gets to an 8.6 percent margin or better, at which point an hourly employee earns the maximum payout on the profit goal of 6.5 percent.

Coming up with the specific targets and payout levels is largely a matter of arithmetic. (see “Bonus Math” at the end of this chapter) The numbers will, of course, be different for every company. You must do the math. The bonus system won’t work if the math doesn’t work. In making your calculations, however, do not lose sight of the fundamental purpose, namely, to get and keep your people motivated. Here are some general rules to bear in mind.

  1. Set the baseline at the lowest point that still guarantees the company’s security.

Everybody must understand that the basic health of the company is paramount. Nobody should earn a bonus for doing the minimum required to protect jobs. We figure, for example, that a pretax profit margin of 5 percent is the lowest we can have without getting into trouble. (Remember, 40 percent of profits go to taxes, so that leaves us with about a 3 percent after-tax margin, which we need for working capital – replacing worn-out machines, handling swings in inventory, and so on.) On the other hand, you don’t want to push the baseline so high that people get discouraged right off the bat. Keep the first payout level well within their range. … Set the baseline at a level we’ve already achieved in the past.

Notice that people are focusing abovethe survival point. Many companies set their goals too low, as if it’s okay to break even. … We never want to operate that close to the line.

  1. Make sure people have the opportunity to take home a significant portion of the additional profits generated under the bonus plan.

Bonuses won’t motivate people if they think the company is being cheap or greedy, or if the rewards aren’t commensurate with the effort they’re being asked to put out. They must feel that the plan is both a fair deal and a way to earn some big bucks

  1. Make it possible for people to earn bonuses frequently enough to keep them involved in the Game.

One of the most common mistakes companies make is to have just one bonus payout per year. Then they compound the mistake by not announcing how much people have earned until long after year-end, and not actually paying it for several weeks beyond that. What happens is that people ignore the bonus program until the final quarter – if you’re lucky. More likely, they pay no attention to it at all and regard whatever they get under it as a gift. That kind of bonus is not a reward; it’s a bribe.

We set up the Stop-Gooter program so that people have a chance to earn a bonus every three months. … People are going to be skeptical when you lay out the bonus deal for them. They won’t really believe it until they see the money in their hands. But once that happens, their attitude will change so fast it will take your breath away.