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How to Create a Bonus Plan for Managers

How to Create a Bonus Plan for Managers

There are 5 components to create a successful bonus plan for managers.  Every bonus plan is different, but the following core components are key to ensure success.

Sales Growth Drives Bonuses

We expect our management team to implement the financial plan laid out by the executive staff. This is usually the owner, president, or CEO. If most of the control your managers have are related to creating or managing sales volume, then we will base this plan on meeting our sales growth goals for the year.

Decide on a Bonus Amount and Work Backwards

Decide on how much you would like to bonus your managers if the company does as well as you hope. For now, do not worry about being able to afford these bonuses. Let us say that you have four managers, and you would be happy giving them a bonus equal to 10% increase in their salary. The only requirement is that your company must meet its sales goals for there to be any bonus.

Create a Budget and Decide on Requirements

Using a budget and other data, decide on your annual sales growth goal for the upcoming year. You may also start this process anytime during the year. We can begin the bonus plan during the start of any quarter. Be sure that your budget considers the cost of these bonuses.

Let us say we have four managers with a salary of $100,000. We will be (hopefully) paying out $40,000 in annual bonuses. We need to add that amount to our budget’s expenses (overhead). We then adjust our sales numbers to overcome the additional $40,000 expense and still generate the net profit we desire.

If we meet our sales goal, the mangers get the bonus we anticipated. What happens if we exceed our sales goal? We should consider increasing their bonus by a fixed percentage. In essence, we will give them a portion of our sales increase without jeopardizing net profits.

Gross Proft and Net Profit

Why don’t we base all of this on gross profit or net profit? You could base the plan on either one. Be sure that the managers have control over gross profit or net profit. It is important that they have control over the factors that determine whether they will receive a bonus.

Create a Written Policy and Procedure

You will need to create a specific policy with the fine print. For example, you might wish to pay this bonus quarterly. If you do not meet you annual sales goal, you may not want to pay a forth quarter bonus.