Determining the Bonus Pool: Just How Much Money Do You Need?

One of the responsibilities I’ve had in the last few years at BFO is to create the bonus structure for our company as part of the Great Game of Business open-book management system.  In the last few years, we have tried different structures to varying success, all with the same end goal of motivating and rewarding people for their hard work.  It’s been a little bit like Goldilocks and the Three Bears.  The first model was too difficult:  people didn’t understand how to calculate their bonus.  The second model was too simple:  everyone received the same amount regardless of position in the company or level of effort expended.  The third system? Well, I have high hopes for the third system.  

I’ve mentioned in an earlier post the Annual Gathering of the Games conference a few of my coworkers and I attended to learn more about playing the Great Game of Business, based on a book of the same name by Jack Stack and Bo Burlingham.  One of the sessions I attended this year was about designing bonus structures that work.  I’ve heard you need to hear something 7 times to truly hear what is being said.  This session must have been my 7th time because it finally sank in.  

Most companies pay bonuses based on hitting company goals around Net Income Before Tax (NIBT).  You set the goal.  Share the number with the team.  Hit the goal.  Receive your bonus check and say, ‘That’s it?  We blew our NIBT number out of the water and that is all I received?’  Here’s the thing that most people do not realize: that NIBT number needs to be split numerous ways before we can get to the actual amount of funds for the bonus pool.  

Determine your base threshold

This is the amount of money that needs to be set aside from the NIBT in order to maintain overall health of the company.  Things to consider when determining your threshold are: taxes, depreciation, debt payments, outstanding AR (can’t pay a bonus if your cash on hand is too low!), capital expenditures, saving for an economic downturn, owners draw, etc.  This is the absolute floor of money that is already earmarked for other purposes.  

Investing back in the company

After you remove the threshold dollars, hopefully, you still have a good chunk of money to figure out how to spend.  Typically, 50% of this money goes back to the company.  This money is for growing the company, whether it be funding a new product development, taking on some charity initiatives, or opening departmental budgets for further projects.

Bonus Pool

We have taken our NIBT, removed the base threshold and removed the investment back in the company.  NOW we are at the true bonus pool and the fun begins on how to divvy up the pool to the people who earned it!  

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