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Employee Bonuses: 6 Steps to Creating an Effective Bonus System

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Business Advice

Owners get paid when the business succeeds, therefore, they work harder. Employees get paid hourly – they might very well be motivated to work slower. Here’s an employee bonus system to help you bridge this gap.

Watch the video below for more details, then read the article!

You employ your workers to meet certain business objectives. Most often, these business objectives are geared towards one goal – profit. You know that if your people operated day in and day out like invested owners, instead of regular employees, your profits would likely be more than double what they are today.  If you’re not sure – think about what things were like when you’re onsite pushing operations. Things happen faster, with less mistakes.  It’s not uncommon to see owners who, when they were hands on,  could produce double the work that their current crews accomplish.

Why you need to measure your employees:

Lucky for you, your employees’ impact on profit is measurable. And when your own rewards are directly dependent on company performance, you can bet it’s in your best interest to measure your employees’ productivity! After all, the better their productivity, the better your company profit, and the better your rewards.

However, employees are all too often rewarded the wrong way:  they are paid, and only paid, based on hours worked. The longer they work, the more they get paid. The faster they work, the less they feel they will get paid. You are only rewarded when the company is successful – why should rewards be any different for your employees?

Tying employee measurements to a bonus system:

Your people should share in the same risks and opportunities that motivate you. While employee wages are fair compensation for work invested, to truly build a business where employees’ think, act and make decisions like they own the company, your employees must be motivated by company performance and productivity – just like you, the owner. So how do you get your employees motivated to perform better? You tie their productivity and overall performance to a bonus system. Here are the 5 steps to creating an effective bonus system, based on employee performance:

1. Start with a budget.

You need an operating budget to plan for bonuses. Your budget sets the basic expectations for the company: what you need to sell, how many hours you have to complete the work, your overhead expense limits and, of course, a plan for company profit.  When your company (field staff, office, and management) pull together and beat the basic expectations for sales and profit, then everyone shares in the reward. Your operating budget outlines your plan for profit and, in turn, it also becomes a system through which you can setup an effective bonus program. You don’t have to open your books to your employees, but you need to motivate them with some basic information.

Remember: bonuses are a reward for beating expectations.  Bonuses shouldn’t just be ‘expected,’ they should only be the result of exceeding expectations!

2. Use your budget to create a pricing system.

Use your budget to set profitable sales goals and an overhead recovery system to price your work. Your operating budget will give you all the information you need to setup a profitable and effective bonus system.

Using your budget you can calculate:

  • What you need to sell
  • How many labor hours you have to do the work (your productivity rate)
  • What your equipment, material, and subcontractor budgets are
  • Your overhead budget
  • A target net profit
  • A pricing system that’s specifically calculated for your company’s overhead and net profit

Never created a budget before? No problem – come to any one of our Plan for Profit happening all over the US and Canada in Spring 2011. At around $150 for a 2-day workshop, it’s the best money, and time, you’ll ever spend on your business.

3. Price your work following your pricing system.

In order to be profitable, your job prices, or estimates need to be tied to your plan for profit. Use the pricing system calculated by your operating budget to price all your work. This way, you ensure your pricing is accurately covering your costs, your overhead and your profit.

4. Pay for performance.

You can use your labor ratio from your budget to help set appropriate wages based on sales goals. Foremen who can drive more production (sales) should be paid more than those who don’t drive as much. Your budget will tell you what field labor ratio is profitable for your employees.   Your crews’ wages, and their production (sales) goals, should be tied together. Each crew should have a profitable sales goal, based on the cost of their wages.  Your job is to sell enough work. Their job is to bring it in on time and on budget. You don’t need to share every number in your company – keep it simple. Sales, a labor ratio, and an overhead ratio is all you really need.

5. Work to achieve your sales goals as quickly as possible.

Once the sales goals for the crews are set, they need to work to achieve and beat those goals. But they can’t sacrifice quality – if warranty or end-of-job quality issues come up, they’ll have to go back and fix them. While they are fixing quality, warranty, or punchlist issues, they aren’t getting any closer to their sales goals. Make sure your employees realize that waste has a huge impact on opportunity. While it is important for them to ‘breakeven,’ and surpass their sales goals, they must understand that they’re not going to surpass their sales goals if they’re stuck fixing past projects or dealing with the repercussions of an accident.

6. When your company/crew beats sales goals, what was overhead becomes bonus.

When your pricing system is calculated based on your sales goals, you can accurately set goals. For instance, your overhead recovery is pegged to your sales goals.  When you hit your sales goal, your overhead costs are “paid,” if you’ve followed your pricing system and managed your overhead spending.  Any sales over and above your sales goal don’t need to “recover overhead.”  Now that money – the money used to pay overhead – can be used to give out bonuses to company employees. If your overhead is 20% of your sales, you can now use 20% of every dollar over and above your sales goals as “bonus capital” to those crews/employees that beat their sales goals.

When your crews are working to beat sales goals, while maintaining high levels of quality and safety, you truly have employees who think like entrepreneurs, rather than hourly employees. Employees that think like entrepreneurs have invested interest in your company – they care about your company’s success and they want to see their team to win. These people will help you see your profits double. Encourage more employees to think like invested owners with bonuses that are tied to employee performance.

Curious to see how one landscape contractor built his bonus structure around employee performance?  With the help of LMN’s budgeting software, Nathan Helder of Gelderman Landscaping was able to implement an incentive program, based on what he calls “open financial management,” which ties employee bonuses to “saved profitability.”

Click here to read more about Gelderman’s story.

Additional Reading:

How Landscapers Can Actually Double Their Profit Margins

Increasing This One Metric to Double Your Landscaping Profits

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