Bonus Madness

Bonuses can be an integral part of a salesperson's compensation plan if implemented properly. It's the “if implemented properly” part that gets companies into trouble.

In general, the term “bonus” means something paid or given in addition to what is usual or stipulated. Furthermore, I feel that bonuses should be earned in some fashion, not simply given out willy-nilly. We've all seen bonuses paid to people for just staying in the job. That's not a bonus, that's a bribe!

Where Bonus Money Comes From

I also feel that bonuses should be paid out of the annual profit that the company makes. No profit, no bonuses.

This is an unpopular stand for two reasons. The first is that once you have paid out bonuses for two or more consecutive years, they are no longer “bonuses” and a “sharing of the wealth (profits),” but are considered as an integral part of the compensation package and therefore expected by the people receiving them.

One of the companies I worked for had an explicit policy of paying bonuses out of the company profits. The first time we had an unprofitable year, there was an uprising among the staff because the company had no money to pay the bonuses.

In the end, in order to keep the peace, the company went further in debt and paid the bonuses. Then they canceled the bonus program altogether. The greed of a few affected the well being of the many.

The second reason why paying bonuses from the annual profits is unpopular is that the salespeople, who bust their collective butts to bring in the profits, get really annoyed when they see a lot of needless overhead or high-priced staff who don't contribute directly to the company's bottom line. The salespeople perceive the overhead eating away their potential bonus.

It's for this reason that I feel everyone except the salespeople should not have bonuses as part of their basic compensation plan.

Bonuses as an Incentive or Reward

If you've got your costs under control, then if all your salespeople make their sales targets, you should be profitable or at least break even.

If this basic formula, Sales - Costs = Profit, isn't working for you, the paying of bonuses is the very least of your problems!

So, it makes sense to incent your salespeople to make the sales and make quota.

In my eBook titled "Simplified Compensation Plans That Work," two of the six plans include a bonus component. I also outline the pitfalls that a company can fall into when paying bonuses.

The best way to use bonuses as an incentive is having a plan that pays a percentage of gross sales at various levels of quota achievement, usually starting at 90% of target. For example, at 90% of target the salesperson gets a bonus of X% of gross sales, at 95% of target he gets Y% of gross sales, at 100% he gets Z%, etc.

This type of bonus plan can continue in 5% steps for as high as you wish. The trick is determining what the X, Y, Z, etc bonus percentages are.

When to Pay Incentives and Rewards
While a lot of companies wait until year end to pay incentives, this is a bad idea. A year-end payment is a good idea for a reward and a bad idea for an incentive. In order for an incentive to incent, it needs to be paid out on a more frequent basis.

I recommend that incentive bonuses be paid out at least quarterly. Monthly is better but quarterly will do. The closer to the activity you want to incent the better. If you want to spur the team onto meeting monthly goals, pay the incentive bonus monthly. If you have a long sales cycle, quarterly incentive bonus payments should work okay.

It's at the end of the year that you want to give out any bonus rewards. Usually these rewards are of a fixed amount and given to people for attaining specific targets.

Bonuses Gone Mad

You have to be careful how you set up this type of reward arrangement. You can find yourself with one of your salespeople who is $2 short of attaining a target that might net him a $5,000 reward bonus. What do you do? Deny him the bonus or bend the rules and give it to him.

Can you imagine the problems that not giving him the bonus would cause? But where do you draw the line... $20? $200? $2,000? If you're going to change the rules, why have any in the first place?

As a sales manager, this is not a conundrum I would want to find myself in as it's a no-win situation.

Clear Rules

If you're going to implement a bonus program, make sure it's well thought out, well documented, and crystal clear. Make sure everyone understands the rules. Before you roll out the program to the staff, make sure you've brainstormed all the possible exceptions that may arise up to and including the fact that your costs have risen and the company is in a loss situation.

For the most part, people will feel that the bonus program is part of their basic compensation plan and you don't tamper with someone's compensation plan. Ever!

Bottom Line

The bottom line is that your bottom line can be adversely impacted by a poorly implemented bonus program. On the other hand, a well-thought-out bonus plan may be just the thing your bottom line needs.

Avoid the pitfalls, incent the troops, and make more profit. Now, that sounds like a plan!