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In the past, our company has used a percentage of earnings before taxes (EBT) to calculate management bonuses. Although simple, the EBT method can cause fluctuations and, depending on the actions of the owners, may not be representative of individual efforts.
I have been given the task of suggesting a new bonus structure for executives. I would like to hear what other members use in their companies. This information would greatly assist us in designing a new bonus structure.
Robert Bona (Robert@chudleighs.com )
Response:
We have implemented balanced scorecards for our managers with fairly good results. In developing our scorecards, we read Robert Kaplan's articles and also a book by William Abernathy, Managing without Supervising, which gives very concrete, practical advice, with lots of examples of scorecard drivers for many management positions.
John Bailey (johnb@ramosoil.com )
Response:
I have seen a number of methods that work. Many cap management bonuses as a percentage of base salaries – typically not higher than 50 percent of base, and usually in the 20 percent to 40 percent range, depending on the level of the manager. For example, a senior manager with $100,000 salary and 40 percent maximum bonus has a maximum payout of $140,000. Also, there are typically multiple criteria, such as earnings before taxes or some other financial performance criteria.
Other criteria that can be included are key performance metrics, such as specific management-by-objective criteria, customer satisfaction ratings, etc. The criteria and relative values are laid out in a grid format so that bonuses can be easily calculated. The benefit of this method is it caps bonuses within a certain definable financial range, and bonuses can be tied to a combination of personal and overall business performance criteria with different weightings. This is just one of many types of bonus plans. If you would like to discuss this, feel free to contact me.
Mike Buckman (mikebuckman@verizon.net )
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