Preface: “People will pay more to be entertained than educated.” Quote from: Johnny Carson
Implementing a Bonus Plan in Your Business (Segment IV)
Construction Example
Jaden was so pleased with his new bonus plan that he told his friend Brendan about it. Brendan runs a construction company.
Brendan loved the idea, but he realized he would need to adapt Jaden’s bonus plan to make it work for his company. Why? Some of Brendan’s profits came from work his men did as subcontractors for other businesses. In those situations, labor was pretty much his only direct cost. Therefore, it was a significant percentage of sales. Some of his other sales came from projects he did for homeowners, such as adding a sunroom. In those situations, his direct costs were labor and materials. Although labor was still a significant percentage of sales, it was decreased. Some of his sales came from general contracting jobs, where his direct costs were labor, subcontractors, and materials. On these jobs, sometimes labor was a relatively small percentage of sales.
Brendan realized that to create an effective bonus plan, he could not simply base it on a reduction in the direct labor percentage. If he did that, then employees would receive a bonus or be denied a bonus based mostly on what type of jobs the company was doing, and not based on their performance.
He and his accountant Jonas sat down and discussed the specifics of Brendan’s business. They realized that for every job the company did that included labor, Brendan calculated an estimated cost for labor. That cost was then marked up and put in the bid. After the job was finished, Brendan would see what the cost of labor was for that job.
They opened a spreadsheet and started calculating. Eventually, a formula appeared that would give the employees a bonus based on coming in below estimated cost for the labor portion of the job. If they performed well, the company would benefit, and the employees would benefit.
What if Brendan simply started estimating the cost lower so that he no longer would need to pay the employees a bonus because they could no longer perform under the estimated cost? Jonas encouraged Brendan to tweak and modify the bonus system as needed, but to always remember fairness. If he lowers the estimated cost, for example, then perhaps he should increase the bonus in another way. If the bonus does not benefit the employees, then it may fail to motivate.
Alignment
A variable pay plan can help align the goals of the employees with the owner’s vision. If your company could use a realignment, consider implementing a variable pay plan.
This article is general in nature, and it does not contain legal advice. Please contact your accountant to see what applies in your specific situation.
Jake Dietz is a CPA, Business Consultant, with Sauder & Stoltzfus, LLC, a certified public accounting firm, in Ephrata, PA, specializing in entrepreneurial business accounting and tax services, bookkeeping, business valuation, and peripheral CPA services. Jake can be contacted at 717-961-9811, or jdietz@saudercpa.com