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- Designing a Bonus Plan
Do you have a great bonus plan for your sales team?
The right plan will reward & motivate your team to drive results. As the owner, your interests should be aligned, and you're happy to sign those big checks.
Caution! People hate it when their bonus plan is changed. They always think you are trying to screw them, even if the new plan is more rewarding.
Be sure to put a lot of thought into the plan if you are going to change it. You don't want to tinker with it later.
When you have the wrong people, it's easy to blame the bonus plan. Business owners think a new plan will magically fix all their problems. I wish that were true!
Here is my guide to creating rewarding bonus plans for salespeople
The 5 Rules
1. Simple
The plan must be simple.
Your employee should be able to explain their plan to you clearly and calculate it themselves. I've seen crazy spreadsheets with 15 categories, each with different weights of importance. 🤯Â
Example: 3% of sales
2. Aligned
You need alignment between what the bonus plan rewards and what you want as the owner.
If you only care about sales volume (and have a fixed cost of goods), keep it simple by paying a percentage of sales.
In a mature business, you may decide to reward for sales growth in addition to rewarding for volume. Often, people won't move outside of their comfort zone if you don't push them.
Example: 2% of sales + 4% of sales growth vs last year
If the salespeople have a lot of flexibility with the gross profit margins (GPM), then gross profit should be a factor. You would not be happy if salespeople sold everything at 50% GPM while you expect 75% GPM.
In this case, you could pay on gross profit dollars.
Example: 4% of gross profit + 6% of gross profit growth vs. last year
I'm now elevating our best people by paying based on net profit. Nothing aligns a business owner more than bottom-line profit. The challenge is that educating people on how the P&L works takes time.
3. Control
You want to reward people based on activities they can directly control.
People get frustrated when their livelihood is dictated by factors they can't influence.
For senior & middle managers, they may not directly sell the jobs, but they decide who to hire and how well they get trained.
4. Exciting
The upside of the plan should be exciting.
"What if you could earn $200k+ working the same hours?"
Be sure to forward-test the plan to see how much more you would make at those high levels. Ensure your net profit will be much higher after you sign big bonus checks.
5. Painful
The downside of not hitting the bonus should be painful.
If they are okay with not hitting the bonus, you have the wrong person or are paying too much.
You want them to have some skin in the game.
Time Frames
The bonus could be paid weekly, monthly, quarterly, or annually. The time frame will depend on the length of your business sales cycle.
A weekly bonus helps drive the sense of urgency of having good weeks. The problem is this sometimes leads to short-term thinking.
A monthly bonus drives good months, but some people will sandbag the last few days if they aren't going to make the bonus. They delay work until the next month, giving them a head start.
A quarterly bonus rewards medium-term objectives. Initiatives that take longer to implement & see the rewards, such as customer or employee retention rates.
An annual bonus is the best for rewarding long-term projects. This could be hitting specific profit targets & yearly sales goals.
The higher the level of the person, the longer time frames you can go. A delivery driver gets paid at the end of every day. Owners think in terms of 3, 5, 10+ years.
Structure
There are three main structures:
Base + Commission
Percentage of Salary
Draw Against Commission
Base + Commission
Base plus commission based on performance.
Example: Store manager who directly controls job pricing & sales.
Weekly: 2% to 5% of gross profit based on volume
Monthly: 4% of gross profit growth vs. last year
You can mix & match timeframes with objectives. Here we’re rewarding for volume every week and rewarding for growth every month.
Percentage of Salary
Salary plus a percentage of their salary based on performance.
This model works well for leadership roles that oversee multiple locations that vary in size.
Example: District Manager who oversees 6 to 10 locations. They earn a percentage of their monthly salary based on the net profit margin of their market.
Salary $8k per month
12% = $1.6k bonus (20% of $8k)
14% = $3.2k bonus (40% of $8k)
20% = $8k bonus (100% of $8k)
To forward-test this:
Current: $600k sales at 12% net = $72k profit
At 20% net x $600k = $120k profit
Profit: +$48k from 12% to 20%
Bonus: +$6.4k ($1.6K to $8K)
Would you pay $6.4k more in bonus to generate $48k more in net profit? I sure would. If not, adjust the numbers until it makes sense to you.
Would you pay $6.4k more in bonus to generate $42k more in gross profit? I sure would. If not, adjust the numbers until it makes sense to you.
Draw Against Commission
Weekly/bi-weekly draw that's pre-payment of commission.
Example: monthly draw of $4,500, paid $1,038.46 per week.
At the end of the month, we calculate their gross profit margin, which determines the percentage of sales earned.
In February, they sell $100,000 at 50% GPM, earning them 8.5% of sales = $8,500
Since they've already been paid $4,500 via the draw, they would receive an additional check of $4,000 ($8.5k - $4.5k)
In March, they sell $125k at 53% GPM, earning them 10% of sales = $12,500
They receive an additional check of $8,000 since they've already been pre-paid $4,500.
The forward test: for every additional 1% GPM, they earn 1/2, making a win-win. If you think that's too generous, reduce the increases to 0.25% of 0.33% for every 1%.
Next Steps
Good luck in designing your plan.
Remember to follow the five rules: simple, aligned, control, exciting, & painful!
Please share this post with another business owner!
Cheers!
Brian Beers