1An Employee Owned Company

A Stake in the Outcome: Designing a Great Bonus Program

Presented by:

Rich ArmstrongThe Great Game of Business | SRC Holdings Corp.Springfield, MO417.425.0705rarmsgtrong@ggob.com

"The whole concept of The Great Game of Business is beautiful – consistency, alignment, and transparency, infused

with core values and brought to life with powerful mechanisms. It is inspired and inspiring."

Good To Great author Jim Collins

2An Employee Owned Company

• They are discretionary. aka ‘The Santa Bonus’

• They are too complex. aka ‘Rocket Science Bonus’

• They create silos. aka ‘The Dog Fight Bonus’

• No buy-in on the goal. aka ‘The Lotto Bonus’

• No communication. aka ‘What Bonus’

Why Bonus Plans Fail

3An Employee Owned Company

The Secret to Creating

a Great Bonus Plan:

$9,000,000.00

People SupportWhat They

Help Create

Incentive plans, alone, won’t improve performance.

An incentive plan can help, if …

• people know the company’s most important goals

• people are enthusiastic about those goals

• people can see how they can support those goals

• people feel empowered to work towards those goals

• people understand what they stand to gain if they reach

those goals

People Support What They Help Create

4An Employee Owned Company

Accelerator Picture

Educate(Think like an Owner)

Empower(Act like an Owner)

Engage(Feel like an Owner)

5An Employee Owned Company

Know & Teach the RulesFinancial Transparency & EducationHigh Involvement PlanningThe Critical Number

Follow the Action & Keep ScoreKeep Score ‐ ScoreboardsFollow the Action ‐HuddlesForward Forecasting

Provide a Stake in the OutcomeRewards & RecognitionMiniGamesOwnership

SELF-FUNDEDEnsure the Company’s Financial Security & Improved Value, FIRST

GAIN-SHARE

Provide a Significant Portion of the Gain

WHAT’S YOUR CRITICAL NUMBER?

Rally People Around a Common Goal

CREATE WINSGive People a chance to Win Early and Win Often

Communicate, Communicate, Communicate.

LINE-OF-SIGHTUse the Bonus to Teach

People the Business

Always Celebrate the Win and Recognize

the Players

Building Blocks of an Effective Bonus Plan

• Ensure Long-Term Financial Security, FIRST!

• Self-funded: “Gain share” not “Profit share”

• Minimum performance = the profit/cash needed for continued growth and sustainability

• Mindful of the real payoff: the generation of wealth in the form of equity

• Watch cash flow and business fluctuations

• Test the Plan

SELF

-FU

ND

ED

6An Employee Owned Company

Where do all the profits go?

Back into the business

• Inventory

• Fixed Assets

• Accounts Receivable

• Pay Down Debt

• Save

To the Shareholders

• Dividends

• Buyout

SELF

-FU

ND

ED

Return on Sales

3%4%to5%

6%

DyingSurviving

Thriving

Establishing your baseline (or minimum performance)Ask yourself what cash investments you plan to make in the plan year that are not included in your profit and loss statement?

For example:

Plan Profit before tax = $250,000

Taxes ($100,000)Add back depreciation $ 50,000Change in accounts receivables ($ 25,000)Change in inventory $ 25,000Capital expenditures ($ 75,000)Debt payments (principle only) ($ 50,000)Owners draw (i.e. dividends) ($ 25,000)Savings (cash in the bank) ($ 25,000)

What’s left? $ 25,000

Required ‘minimum’ performance = $225,000

SELF

-FU

ND

ED

7An Employee Owned Company

• Provide a Significant Portion of the Gain

• Long term success for the company and long term success for the people

• Minimum of 50% of the additional profits generated above our required “minimum” performance

• Target 10% to 20% of salary – one to two months additional pay!

• Enhances their standard of living

10% of Pay = 5.2 weeks of extra pay!20% of Pay = 10.4 weeks of extra pay!

GA

IN-S

HA

RE

Rally People Around a Common Goal

• Ensure that everybody remains focused on the same goals - we either win together or we don’t win at all

• Stick to One or Two Critically Important Goals

• Buy-in “People tend to support what they help create”

What’s your Critical Number?

8An Employee Owned Company

Use the Bonus to Teach People About the Business

• Your bonus plan may be the most effective educational tool you have

• Create “Line-of-Sight”

• Learn to “check the entitlement attitude at the door”

• Put the “what’s in it for me?” (WIIFM) in the right perspective

Give People a Chance to Win Early and Win Often

• What gets people motivated? Winning!

• Start with small, frequent bonus payouts and let them grow as performance continues to improve

• Earn a bonus every three months

• Potential payouts increase each quarter

• Incremental payout levels range from 1% to 20% of salary

• Small Wins Add Up to Big Wins - MiniGames

Give People a Chance to Win Early and Win Often

9An Employee Owned Company

Create an Early Win

Hourly BONUS PLAN

Q1 Q2 Q3 Q4 BONUS ADDITIONAL ADDITIONAL ADDITIONAL 

LEVEL TARGET TARGET TARGET TARGET POOL % OF PAY DAYS PAY HOURS PAY

▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼ ▼

Plan 162,500              325,000              487,500              650,000              ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐

Threshold 150,000              300,000              450,000              600,000              ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐

1 152,420              307,260              464,520              624,200              12,100                1.00% 2.6 20.8

2 154,840              314,520              479,040              648,400              24,200                2.00% 5.2 41.6

3 157,260              321,780              493,560              672,600              36,300                3.00% 7.8 62.4

4 159,680              329,040              508,080              696,800              48,400                4.00% 10.4 83.2

5 162,100              336,300              522,600              721,000              60,500                5.00% 13.0 104.0

6 164,520              343,560              537,120              745,200              72,600                6.00% 15.6 124.8

7 166,940              350,820              551,640              769,400              84,700                7.00% 18.2 145.6

8 169,360              358,080              566,160              793,600              96,800                8.00% 20.8 166.4

9 171,780              365,340              580,680              817,800              108,900              9.00% 23.4 187.2

10 174,200              372,600              595,200              842,000              121,000              10.00% 26.0 208.0

Quarterly Payout %         10% 20% 30% 40%

Progressive Payout %         10% 30% 60% 100%

CRITICAL NUMBER: PROFIT BEFORE TAX

( Base Pay  x  Level %  x  Progressive Payout % ) ‐ ( Previous Payout )

Example Payout $30,000 Projected Wages

By Quarter Q1 Q2 Q3 Q4

Level Achieved Level 6 Level 8 Level 6 Level 5

% of Wages 6% 8% 6% 5%

Projected Annual Payout $1,800 $2,400 $1,800 $1,500

Progressive Payment 10% 30% 60% 100%

YTD Cash Payout $180 $720 $1,080 $1,500

Less Payouts Received $0 $180 $720 $1,080

Quarterly Cash Payout $180 $540 $360 $420

10An Employee Owned Company

Employee Payout Calculator  $           30,000 

By Quarter Q1 Q2 Q3 Q4

Level Achieved ‐ % 6% 8% 6% 5%

Projected Annual Payout $1,800  $2,400  $1,800  $1,500 

Cumulative Quarterly Payout % 10% 30% 60% 100%

YTD Cash Payout $180  $720  $1,080  $1,500 

Less Payouts Received $0  $180  $720  $1,080 

Quarterly Cash Payout $180  $540  $360  $420 

Quarterly Days Paid 1.6  4.7  3.1  3.6 

Quarterly Hours Paid 12.5  37.4  25.0  29.1 

Estimated Taxes

Social Security  6.20% $11  $33  $22  $26 

Medicare 1.45% $3  $8  $5  $6 

401K 5.00% $9  $27  $18  $21 

Federal Tax (Gross Wages ‐ 401k) 25.00% $45  $135  $90  $105 

State Tax (Gross Wages ‐ 401k) 6.00% $11  $32  $22  $25 

     Net Pay $79 $236 $157 $183

Projected Annual Wages:

11An Employee Owned Company

Communicate, Communicate, Communicate

• Poor communication is by far the main reason most bonus plans fail

• Take the time to educate your team on the plan

• Weekly Huddles – communicating by the numbers

• Forward Forecast

12An Employee Owned Company

13An Employee Owned Company

14An Employee Owned Company

Tetris Wall

Tetris Wall

15An Employee Owned Company

Tetris Wall

Tetris Wall

Tetris Wall

16An Employee Owned Company

Tetris Wall

Always Celebrate the Win and Recognize the Players

• Don’t underestimate the simple act of recognition

• It’s not all about the pay – all payouts should be accompanied with a handshake and a personal, sincere thank you

• Have a little fun and CELEBRATE THE WIN!

17An Employee Owned Company

18An Employee Owned Company

Total rewards

Adding it all up at SRC….

COMPENSATION

BENEFITS

WORK-LIFE

DEVELOPMENT & CAREER OPPORTUNITIES

PERFORMANCE & RECOGNITION

compensationBase Wages

Salary Pay

Hourly Pay

Premium Pay

Skill-Based Pay

Variable Pay

Bonus Programs

Incentive Pay

Short-term Profit Sharing

Individual Performance Based Incentives

BENEFITS

Legally Required/Mandated

Unemployment Insurance

Worker’s Compensation Insurance

Social Security Insurance

Medicare

Leave of Absence

Healthcare Benefits

Medical Plan

Dental Plan

Prescription Drug Plan

Flexible Spending Accounts (FSAs)

Life InsuranceSpouse/Dependent Life Insurance

AD&D Insurance

Short-Term/Long-Term Disability Insurance

Retirement Employee Stock Ownership Plan401(k)

Pay for Time Not Worked

Vacation

Holidays

Bereavement Leave

19An Employee Owned Company

WORK-LIFEWorkplace Flexibility/Alternative Work

Flex-Time

Compressed Workweeks

Community Involvement

Community Volunteer ProgramsMatching Gift Programs

Sponsorships

Donations

Employee Discounts

Health Care Discount Program

Financial Support

Financial Planning

ScholarshipsJob Sharing Part-time Employment

Health and Wellness

EAPOn-site Fitness Facilities

Discounted Fitness Club RatesWeight Management Programs

Smoking Cessation Assistance

Stress Management ProgramsVoluntary Immunization Clinics

Health Screenings

Nutritional Counseling

On-Site Nurse

Return to Work ProgramsReproductive Health/Pregnancy Programs

DEVELOPMENT & CAREER OPPORTUNITIES

Learning Opportunities

Tuition Reimbursement

Corporate Training

New Technology TrainingOn-the-Job Learning

Conferences

Webinars

Self-Development Tools

Coaching/Mentoring

Leadership Training

Access to Information Networks

Formal or Informal Mentoring Programs

Advancement OpportunitiesInternships

Overseas Assignments

Internal Job Postings

Job Advancement/Promotion

Job Rotations

Succession Planning

Education Incentive

GGOB

PERFORMANCE & RECOGNITION

Performance1:1 MeetingsPerformance Reviews

Project Completion/Team Evaluations

Performance Planning/Goal Setting SessionsRecognition

Service Awards Retirement Awards

Peer Recognition Awards

Spot Awards

Managerial Recognition Programs

Organization-wide Recognition Programs

Exceeding Performance Awards

Employee of the Month/Year Awards

Appreciation Luncheons, Outings, Formal Events

Employee Suggestion Programs

Goal-Specific Awards (Quality, Efficiency, Cost-Savings, Productivity, Safety)

20An Employee Owned Company

Accelerator Picture

Incentive plans, alone, won’t improve performance.

An incentive plan can help, if …

• people know the company’s most important goals

• people are enthusiastic about those goals

• people can see how they can support those goals

• people feel empowered to work towards those goals

• people understand what they stand to gain if they reach

those goals

People Support What They Help Create

Educate(Think like an Owner)

Empower(Act like an Owner)

Engage(Feel like an Owner)