In the last newsletter we talked about what to do about awarding a Xmas bonus. [If you missed it click here to find it] Now we talk about putting a bonus scheme into place for 2019.

If your financial year-end is say March, the next few months could be a good time to develop and trial a scheme before launching it in April.

What should l incentivise people on?

The profitability of the business is a simple way to measure business success. If there is a large minority of support staff then you might also consider cost-savings/efficiency savings as being the other side of the profit coin.

You might be tempted by the achievement of individual objectives. Our general experience in the SME space is that staff appraisals don’t happen consistently enough so we wouldn’t recommend a performance pay system based on the achievement of individual objectives, as MDs usually haven’t the infrastructure in place to make this watertight.

What do l need to do first?

You will presumably have a business plan and a budget. Interrogating the likelihood of achieving a sufficient profit to be able to afford a profit-based bonus is the first step. If your assessment is that the profit figure is going to be insufficient consider the criteria for your top people as a pre-cursor to offering a wider profit-sharing scheme.

You need good data so you need accurate monthly management accounts to monitor profitability and to be able to communicate progress easily, to your management team and then staff, post launch.

You may have bespoke software if you run a sales based, or project-based, organisation enabling quick assessment of profitability if looking to incentivise individuals.

If you don’t have either of these, this is the immediate focus. Inaccurate data is guaranteed to lead to issues later on – employees will think one thing, you as MD will think something else and trust and credibility will dissipate in the event of misunderstandings or disputes.

Anything else pre-launch?

Test the model you are proposing. Does the maths work? Are there any unintended consequences? Are there grey areas? (if so tighten the scheme up). Will it clearly drive the behaviour you are looking for? Test it with other Directors or advisors to ensure the outcomes you seek and that the wording is clear with no ambiguity.

Plan the communication – what are the goals? What are the rules going to be? (For example, is there to be a hurdle rate before any bonus is paid out? What are you going to offer joiners or leavers within the period of the bonus scheme?)

Use worked examples so people can see what needs to happen to qualify for a bonus and how the scheme is going to work in real life.

Rather than say there will be a predetermined formula for distributing a fixed percentage of profits, we would suggest an approach where there is a company profit threshold below which no profits will be distributed and that there will be maximum limits set on the proportion of profits that will be distributed (say 5%) and/or the percentage of salary that will be distributed as a profit share (say 10%).

Having launched, what do l do then?

Regularly communicate performance at monthly management meetings and provide a general status update (verbally) to all staff on company performance ideally quarterly. The purpose here is three-fold:

• To manage expectations if performance is below expectations
• To give people a steer as to what needs to be done to get back on track.
• To encourage staff retention by communicating the likelihood of a bonus pay out

Ensure that you pay the bonus when you say you will.

A chunk of our work comes from resolving disputes between employees and the Owner. It usually comes down to poor wording or a misunderstanding on how to get a bonus. The scheme rules are important but they need to be watertight pre-launch. You are likely to run into trouble if you try and change the rules midway through the year because of ambiguous wording.

So wherever you are in your business cycle, and whatever you want to do, if you feel the need for a fresh, neutral pair of eyes give us a call for an initially free consultation.

Contact stephen.cowburn@lgbusinessadvisors.co.uk  or 07974 425361, for a focused discussion.