For example, let’s say that the gross margin was enough in the first quarter that the bonus percentage would yield a $250 bonus—a quarter of the ultimate $1,000 yearly bonus. The company owner would pay a first quarter bonus of 67 percent, or $167.50. If the financial numbers for the six months warrant a $600.00 bonus, then 75 percent of that — $450.00 — less the $167.50 already paid, which comes to $282.50 would be given out to each employee.

The gross margin at nine months suggests an $850.00 bonus, which at 85 percent comes to $722.50, less the $450.00 already paid, which would result in a third-quarter payment of $272.50. And if the end-of-the-year numbers call for a $1,000 bonus, $277.50 is paid to each employee because $722.50 has already been paid out. The YTD factor becomes self-correcting, yet allows for slowdown in results without putting the company at risk.

This reserve within the company will prevent early payout for exceptional results without a sufficient catch-up period if these results don’t continue. Employees can share in the rewards as they occur rather than waiting until the end of the year — an added incentive.

Plan Specifics

General Management. The general manager must measure the company’s real equity value in the same way an investor or potential purchaser would: based on market value of assets, their ability to produce economic value, the ability of the management team to produce cash and profits on a recurring basis, and the ability of the company to produce quality products and maintain customers on a consistent basis.

If all managers make their goals, the general manager will make his or her goals because the equity value will increase. This can encourage general managers to drive volume and throughput well beyond break-even levels and to support their managers to achieve results. For an overview of how the incentive program should be structured for general management and other company departmental areas, see our chart.

Sales. Support the selling process from start to end. If workflow through the plant is level, then overhead as a percentage of sales is reduced, producing greater profits or more competitive rates.

Therefore, it’s important to emphasize interdepartmental coordination in your company. Sales can support Production by seeking jobs that fit the plant with flexible delivery schedules if needed. Production can support Sales by over-recovering rates and delivering quality products on time and under budget. Pricing/Estimating can support the whole process by improving the win ratio of jobs bid and by leveling the load to stabilize throughput, thus driving volume.

Put salespeople on a tiered commission structure to reward them for new customers and value-added sales. Pay a higher commission percentage for the first 12 months that a customer is with the company, and then reduce the commission percentage, as the customer becomes a recurring customer. This forces Sales to seek new customers, while allowing customer service to grow the existing customer base; a team effort.

Simultaneously put Customer Service on an incentive schedule on top of salaries to drive revenue growth and retention from existing customers.

Sales must focus on helping the plant’s throughput. A focus on flexibility and load leveling will serve to fill part of the valleys in slow periods. They must remember that more sales are likely to be produced during off-peak times, while sales during peak times may not.

Production. The best measure of plant throughput is hours worked versus hours billed, which means comparing the hours for a job on all the timecards to what is invoiced to the customer. The closer these are to a 1-to-1 ratio, the better the productivity, throughput, and profitability. When the production team goes over on one job, they will be compelled to go under on another to balance the over-all ratio for the period.

The whole issue of 1-to-1 accountability will bring to light concerns regarding estimating accuracy, department cost justification, scheduling inequities, flexibility, and the need for volume. It will rebalance the rates and force flexible scheduling to meet throughput demands.

When problems arise, flexibility in delivery time will help avoid just-in-time preparation while driving profitability. The ability to slot another job into production while problems are resolved will maximize yield and eliminate standing around a quiet machine.

When work order hours are out of balance, obtain an adjustment if possible. Customer-approved change orders generate more hours against which to charge time, which can help you get closer to the 1-to-1 ratio. If there is no change order, flag each first occurrence for the Pricing department to factor in — and don’t make the same mistake next time.

The End Result

Incentive-based management is a catalyst toward improving direction and creating value.

Tie incentives to your goals to create focus. Motivate the entire work force, allow creative thinking, and gladly pay the bonus when the results improve the equity value of your company.