Follow Dallas Linkedin
Email Dallas Email
Business Growth
Feb 17, 2016

What's The Point Of A Bonus Incentive Plan?

Sponsored Content provided by Dallas Romanowski - Managing Partner, Cornerstone Business Advisors

When we ask business owners about the possibility of installing an employee incentive plan, we often hear one of two responses:

  • “I would like to do something to reward my key employees for their performance.”
  • “You know, one of my best employees left last week for a company for more money. I think I'd better do something to stay competitive in the marketplace. ”
May I suggest that these two motives are not nearly self-serving enough? The purpose of installing a bonus plan for your employees is to motivate them to help you pursue your goals.
 
While owners differ on when, how or even if they want to leave their companies, they all should share the same goal: Whenever you leave, go in style. No matter what type of employee incentive plan you create, it should support your fundamental goals by motivating your key employees to stay with your company and help build its value.
 
Consider the following:
  • Some owners may rarely take an extended vacation, much less cut back on their ongoing involvement without leaving capable management in place to run the business.
  • A sophisticated buyer may not seriously consider your company if it lacks a good management team;
  • You may, at some point, entertain the idea of selling the company to key employees; and
  • Transferring a business to children can be especially risky in the absence of key employees who will remain with the new owners.
Whether your goal is to sell to a third party, transfer the business to children or employees, or retain ownership long-term, the success of your strategy may depend on the presence of motivated, high-performing key employees.
 
We measure the effectiveness of an employee incentive plan in part by how well it motivates key employees to increase the value of a business. Effective plans necessarily reward employees as they increase the value of the business.
 
Usually, this means that owners must develop an incentive formula that links increases in the key performance indicators of the business to the employees’ rewards. In its simplest form, the incentive plan gives the key employee a bonus. In designing a strong incentive plan, consider the timing of the bonus that creates the best incentive. You may want to consider designing a bonus program with an additional incentive for key people to stay with your company – a “handcuff” of sorts.
 
Let's look at how one owner set up his company's incentive plan.
 
After meeting with his advisers, Mel Houston decided to give two of his key employees 30 percent of the company's pre-tax income above $100,000 (the company's historic performance level). After Mel installed this plan, the company's pre-tax income increased to $300,000, so his key employees shared 30 percent of the excess income ($200,000) or $60,000.
 
Because Mel wanted to retain his key employees over a long period of time, he decided to pay half of this bonus after the company’s year end, and subject the other half to a non-qualified deferred compensation plan with vesting over several years.
 
Mel's plan provides that as the cash flow of his business increases (and at the same time the value of the business), he rewards his key employees accordingly. In doing so, both he and his key employees attain their goals.
 
Notice that Mel does not have to reach into his own pocket to pay the bonus. Instead, he is merely sharing a portion of the growth that they create. You may also notice that Mel benefits in two ways from the increase in income. First, he shares in the increased income and cash flow. Second, the value of his ownership interest most likely increases by some multiple of increased cash flow.
 
Keep in mind that the formula you create for your company can and should reflect the specific characteristics of your business. The head of the sales department might be rewarded for increasing the adjusted gross-profit margin. A chef in a restaurant might be rewarded for reducing food costs (without affecting the quality of the meals served). Any factor you identify as a key to increasing the value of your company can be incorporated into your key employee incentive planning.
 
If you would like to discuss your options for installing employee incentive plans to support your goals, please contact us. We can collaborate with you and your other advisers to develop a customized incentive plan tailored to your business and your future.
 
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial adviser. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial adviser. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit planning is a discipline that typically requires the collaboration of multiple professional advisers. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
 
The Cornerstone team includes former C-Level executives, successful entrepreneurs and advisors who offer unmatched experience in delivering advanced, custom-tailored, results-oriented solutions for business leaders. As a member of the Business Enterprise Institute (BEI), Cornerstone is an authorized distributor of BEI’s content and Exit Planning Tools.  We developed the Performance Culture System™ to help clients implement best practices and drive high performance throughout their organization. For more information, visit www.launchgrowexit.com, call (910) 681-1420, or email [email protected].

Other Posts from Dallas Romanowski

Bizjournalblockad
Ico insights

INSIGHTS

SPONSORS' CONTENT
Billcoleman lopw headshot

Reaping The Benefits Of Patience

Bill Coleman - Live Oak Private Wealth
Atromitos micheallegady headshot

Recognizing Our Health Care Heroes

Michealle Gady - Atromitos
Tidewaterinvestmentco merrettemoore headshot

It Is Time To Hit The Road To Find Some Private Company Opportunities

Merrette Moore - Tidewater Investment Company

Trending News

Offices At Mayfaire Developer Plans Commercial Building In Leland's Waterford Area

Cece Nunn - Oct 14, 2021

Will $500M Development Across The River Sink Or Swim?

Cece Nunn - Oct 15, 2021

Wilmington Entrepeneur Launches MyPeriodPal

Johanna Cano - Oct 15, 2021

Leland Brewery Expected To Be Complete In 2022

Cece Nunn - Oct 14, 2021

NCino's Expansion Progresses At Wilmington HQ

Cece Nunn - Oct 15, 2021

In The Current Issue

Health Care Heroes: Lifetime Achievement

“He’s a very quiet-spoken guy, and you would never know what a big deal he is just by talking with him,” said Jim Price, a retired OB/GYN, o...


Social District Could Serve As Business Boost

Wilmington leaders and business owners are hoping to establish their own social district in the downtown central business district (CBD) soo...


New Eateries Add Flavor To District

“Being a part of the Brooklyn Arts District already feels like home, and I’m so excited to be a part of it,” said Alicia Mitchell, who plans...

Book On Business

The 2021 WilmingtonBiz: Book on Business is an annual publication showcasing the Wilmington region as a center of business.

Order Your Copy Today!


Galleries

Videos

Trying to Grow a Business?
2020 Health Care Heroes
2020 WilmingtonBiz 100