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It's Bonus Time

by Barbara Lewis 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 expenses.

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