YEAR END BONUS

Steven Cesare, Ph.D.

A business owner from Illinois called me the other day to discuss myriad compensation issues, especially wage and salary scales, bonus programs, and commission standards for his workforce. Like an increasing number of Green Industry business owners, the Illinois executive now realizes the imminent conflict between employees’ ongoing demands for greater wages, customers’ continued resistance to higher service costs, and of course, the business owner’s sustainable need for corporate profit.

Given those convergent pressures, many owners are altering their focus from the traditional 3%-5% annual salary increase, to a variable compensation model based on exceeding performance standards. The rub remains that increased annual pay raises are naturally compounded each year, eventuating in the inevitable fiscal fact of not getting enough productivity from an employee to justify his/her annual salary.

Case in point, a California business owner has perpetually given annual pay raises to one of his Irrigation Technicians to the point now that the Irrigation Technician is making $42.00 per hour, even though the owner is only billing out irrigation services at $85/hour. That math simply does not work. Similarly, a Florida business owner called me the other day and said he now realizes the errors of his ways by routinely granting annual 5%-7% pay raises to his Maintenance Manager who now is making a salary “north of $135,000,” and naturally expects to be given more than that at his next performance review meeting.

While some owners remain hesitant to introduce variable pay into their compensation programs, many green industry leaders have now seen the light. Beyond monthly or quarterly KPI bonus programs (e.g., gross margin, revenue, field staffing levels, overtime tracking), frequent discussion ultimately leads to the year-end bonus program. Accordingly, this is the standard calculation method for determining a year-end bonus based on company performance, typically distributed to employees at the annual Christmas party.

Calculate the overall annual Company Revenue for the current calendar/fiscal year.
Establish a Net Profit Bonus Threshold
- This threshold will “trigger” if a Company bonus will be paid to employees
- For example, if the Company Net Profit goal is 6% and is met based on year-end calculations, a bonus payout will occur
- Likewise, if the Company Net Profit goal is 6% and the overall annual Net Profit results are less than 6%, no bonus payout will occur
Assuming the annual Net Profit goal is met, the Net Profit dollars must be calculated
Typically, 10-15% of the overall Net Profit dollars are then earmarked into a Bonus Pool
In general, the bonus is distributed proportionately as a percentage of the employee’s annual salary
- Owner, President, CEO, General Manager, CFO, COO, VP: 40% of annual salary
- Branch Manager: 25% of annual salary
- Maintenance Manager, Installation Manager, Office Manager: 20% of annual salary
- Project Managers, Field Supervisors, Account Managers: 15% of annual salary
- Foremen, Irrigators: 10% of annual salary

Here is an example. A landscape company in Illinois makes $8,000,000 in overall revenue during the year, at 11% net profit, exceeding its Net Profit goal forecast of 9%. Those results produce $880,000 in net profit. The Illinois business owner decides to allocate 15% of those net profit dollars into the year-end bonus pool. He then distributes the $132,000 to those employees he deems as being meritorious.

The payout percentages shown in Point #5 represent the total annual bonus potential for various positions (i.e., a sum of monthly KPI bonuses, employee referrals, year-end net profit, attendance, job retention, job quality, skills-based pay) to illustrate the proportional payout across the organizational hierarchy.

The above framework minimizes ambiguity when determining employee bonuses, unifies the employees’ focus onto a single company performance metric, and shifts emphasis from minimalistic annual pay raises based extensively on tenure toward a greater potential money reward due to demonstrable success.

Despite what we tell the wine and brie crowd, we are still capitalists aren’t we?

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