Question

Topic: Career/Training

Reasonable Bonus Structure?

Posted by Steve Moore on 10/24/2008 at 3:27 AM ET 250 Points
I just signed up with the site and see that multiple questions have been asked about a reasonable way to structure a bonus. I will certainly look at those but I wanted to ask a few specific questions.

I am in the process of applying for a position that has not previously existed at this company. My potential employer has asked that I propose a compensation plan as part of the process. My role will be a marketing manager at a company with annual gross revenues currently around six million dollars.

I am not so concerned about the salary as I believe that the vast majority of my compensation should be tied to performance. My question is what would be a reasonable bonus structure, including percentages.

For instance is it reasonable to ask for one percent of total sales and a higher percentage of year over year growth? Is it reasonable to ask for both of those or should it be one or the other?

Any ideas on how to structure a reasonable, clear and concise bonus plan, most importantly the percentages to be paid would be greatly appreciated.

Thanks everyone
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RESPONSES

  • Posted by saul.dobney on 10/24/2008 at 8:50 AM Accepted
    The incentive should match the objectives of the job. Are you looking to increase retained business, win new customers, increase prices/profitability? Personally, I like incentives that reward net profit, plus bonus numbers for new customers for sales/marketing people. For account service/customer service people I'd incentivise retention.

    For me it is also about building change. Obviously for you personally, a percentage of the gross sales would be great, but if I was the employer I'd want to look at capacity to build improvement. If they do £6m sales now, then this should be the base. You're incentive is to turn this into £7m. So ask a percentage of the uplift year-on-year. Depending on objectives you can then factor in a different % for new, versus old business etc.
  • Posted by Steve Moore on 10/24/2008 at 11:57 AM Author
    Thank you for the quick response.

    Lets say gross revenue rose from $6m to $7m. What is a reasonable percentage to ask for?

    If it were to be based on net profit, what is a reasonable percentage to ask for? Do I ask for it on total net profit or net profit increase year over year?

    I realize these are a lot of questions but as I am relatively new in my career and have never been asked to propose a compensation plan, I want to make sure that I am not short changing either party.

    If I were to get monthly bonuses is it fair to ask for a bonus on the months we have year-over-year growth and just rely on salary (which is going to be low) in the months that we don't realize year-over-year growth. Or do we have some sort of running balance that is debited and credited each month depending on performance and is closed out at the end of the year?
  • Posted by Frank Hurtte on 10/24/2008 at 12:24 PM Accepted
    Much of this depends on the company and the owners of the company.

    Bonus should be based on increases in Gross Margin (rather than sales or profit) whenever possible. Here is why... Sales can be break-even or massively profitable - a bonus on profit does not differentiate. Company profits can go up and down based on buying buildings, expanding, bonuses to officers, tax credits etc. Gross margin allows for all of these.

    Now, what would you base your bonus on? If the company wants to grow (not every company does) then base the bonus growth over last year. I personally like a split that is approximately 70% base and 30% bonus.

    The actual percentage of the bonus is too hard to call without some specific facts. I assist companies with setting bonus for sales and marketing people. Contact me if you want to talk in more detail.
  • Posted by Mikee on 10/25/2008 at 12:03 PM Accepted
    I agree with Frank.

    Bonuses should be tied to increases in sales or profit (preferably profit) from the company's standpoint). As a company owner, I would not want to base your bonus on sales that are already ocurring without this new position. I guess I would think that we did that well without your help so I would expect better with your help.

    Mike
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