It's Bonus Time
MBA and Dan Otto
With the end of 1998 fast approaching,
it’s time to begin calculating the bonuses that you’ll be distributing
to your employees. Many companies simply take a percentage of each
employee’s salary or one or two weeks’ salary and earmark that amount as
the employee’s bonus. Employees who work harder than others and put
more effort into their jobs are disappointed that they’ve received the
same percentage as everyone else.
An increasing number of
companies are choosing another route. They pay a competitive salary as
a fixed amount and then distribute the company’s profits as variable
amount based on a formula for each type of job. Jack Stack highlighted
this compensation methodology in his book, The Great Game of
Business, where he profiles a company plagued by problems. Stack
and the employees purchase the company and when the employees learn how
their jobs affect the bottom-line, profits soar.
Another type of bonus
distribution is based on an employee’s contribution to profit. This
type of system works particularly well with law, accounting and other
firms where associates (other than equity members or partners) bill
their time and/or bring in business. Firms pay a competitive fixed
salary or slightly less and then reward employees with a variable bonus
based on several factors. Theses factors could include the amount of
hours billed over a minimum amount, the expenses incurred by the
associate or the amount of new business generated by the associate from
new or current clients.
Take for example an
associate in firm A, who is asked to bill 1800 hours per year. For one
reason or another, the associate is short on hours each month. Yet no
matter how many hours worked or not worked, the associate will still
receive the agreed upon salary. Since the associate is not sharing in
the profits, there is little regard for expenses, which the associate
does not hold to a minimum. Frequent overnight messenger deliveries for
work that could have been completed in time for less expensive regular
delivery by the U.S. postal service are commonplace. Meanwhile, the
associate is jockeying for a larger window office that has just become
available when a partner moves to a new firm. The associate receives a
bonus at the end of the year equivalent to one week’s salary.
Now contrast firm B.
Associates are asked to bill a minimum of 1500 hours at a fixed salary
that is competitive with other law firms requiring 1500 hours. For each
hour billed in excess of 1500, the associate receives a percentage of
the hour as a bonus. To discourage padding the hours billed, the
associate and the partner in charge of the work agree on the number of
hours that it should take to complete the project. The associate
receives credit only for that specific number of hours, no matter how
long the work takes to complete. Prior to the awarding the bonus,
expenses, either for the individual or the firm, are deducted first.
For example, if the associate uses overnight messenger service instead
of regular mail delivery, that expense is deducted from the bonus. If
the associate demands a large window office, that extra overhead expense
is also deducted from the bonus. On the other hand, the associate who
works in a small inside office is credited with the amount saved from
the allocated office expense given to each associate. If the associate
brings in new business from current clients or new clients, then a
percentage of that revenue is added to the bonus.
Businesses that follow
firm B’s method, find that associates work longer hours and work
smarter, while constantly seeking ways to drive down expenses. The
result is that the partners’ income can increase dramatically, since
rule of thumb is that approximately one third of the billed revenue is
profit for the partners.
For non-billing or
non-revenue generating employees, performance-based job descriptions are
critical since bonuses are based on whether the employee meets or
exceeds the performance criteria in the job description. For example,
if a job description for a receptionist is to answer the telephone, the
performance-based job description is for the receptionist to answer the
telephone within two rings.
Since January is one of
the biggest months for employees to switch jobs, make sure that your
salaries are in line with other companies. Many trade organizations
conduct compensation surveys and provide reports to their members.
Several Web sites provide salary data to help executives set appropriate
compensation for their employees: www.wageweb.com, members.aol.com/payraises,
www.execunet.com, www.jobsmart.org and www.futurestep.com.
In an age where excellent or even good service is sometimes rare, the
companies that tie their employees’ bonuses to performance and
bottom-line results are finding that workers treat their customers or
clients as if they were their own and the company was theirs. At firms
where service is outstanding, employees realize that their bonuses ride
on the success of the company and work hard to improve income and limit