Tag Archives: small business growth

It’s Bonus Consideration Time!

I hate bonus time and figuring out how much extra to pay employees at year end. People today expect a year-end bonus or incentive compensation for their efforts. Plus they need the extra $$$ to pay for all their holiday shopping and expenditures. Sometimes bonuses even seem like an entitlement instead of compensation for extra effort and results. What should I do? I try to be generous but the economy is slow and profits are dwindling. Should I pay out lots of cash and hope there is enough to last the next year? Or should I tell everyone there just isn’t enough to go around this year? Or should I get everyone a turkey and tell them to have a great holiday? Here is an email I received from a reader of Construction Business Owner magazine. I write an “Ask The Expert” column every month.

Question: George, As I sit at my computer I’m reflecting on how blessed I am as an individual and business owner. I have been wrestling for some time with how to fairly compensate our senior management team comprised of 6 people: three senior guys including me and three young VP’s of Operations, Administration, and Business Development. These 3 attended your two day Profit Builder Circle boot camp recently in Atlanta which definitely reinforced my philosophies and mentoring of these 3 young men. You really do a great job.

Do you have any suggestions on incentives or bonuses for the management team? In the past, we have used a program that established a set percentage of net income for retained earnings; a set percentage for owners as a return on their ownership equity, and a certain percentage of net income as a bonus to the management team. But now, the older management team members are not putting forth nearly the effort they used to. They bring a lot to the table, but their interest and drive has waned. It is an entitlement problem in my opinion as they are financially secure. I have positioned the 3 younger VPs to run the company and they are doing great and progressing well, but I’m not quite ready to turn things over to them completely. I am still very involved as the CEO and mentor these young managers on the business side.

How do I compensate the 3 younger managers for running the company? How should the older managers be compensated for their ownership, even if they are not providing much on a daily basis as they are being paid a six figure salary now? And what percent is recommended for retained earnings?

I hope to back further away from this business this coming year and improve my golf handicap and want to be fair to everyone, old and new. We have built a very successful specialty service business and my goal is to continue to monitor our processes and procedures and continue to find new ways to improve while continuing to grow all our people. I know there is no magic formulas but I thought you might share your thoughts on this topic. Ken D. CEO -CES LLC

My Answer: Ken, as your older managers get more conservative and less enthusiastic about growing your company, it is time to make a positive change for everyone. First stop confusing compensation with return on equity. Everyone needs to be paid a fair salary and compensated for their contributions based on what the fair market value demands for the job they perform. If an employee is worth $50,000, that is their salary without exception. If they aren’t worth that amount, pay them less or more accordingly.

Profit is return on shareholder’s equity. Owners should share the profits based on their stock ownership less what you keep in the company as retained earnings before profit distribution. The older managers should be paid a salary based on exactly what they are worth to your company. If they only work a few days, they get paid less. As owners, they participate in the overall company profits. If you want to give them a little more like a car, health insurance, or extra pay, that is a gift for tenure and a result of your soft heart. But remember, the extra compensation you pay the older owners for not working a full load makes your overhead higher than it really is, makes you less competitive in the marketplace, and forces you to pay out profit before your really earn it. This actually reduces your company’s net profit and lowers the incentive potential for your younger managers.

The key managers who run your company should receive a healthy salary and benefits based on what they are worth as well. Plus give them a percentage of the pre-tax profit for their efforts and contributions. I recommend the first 15% return on equity stay in the company before any profit split takes place. If the 3 managers are 100% responsible for the company results, allow them to earn up to 35% of the profits as their incentive. Then the owners will receive the next 50% of profits as their return. – George

Well now it’s your turn to decide if company bonuses are in order for your employees. Good luck doing the right thing. If you have any good employee compensation ideas, email me please post them here or on our LinkedIN Group HardHat Biz Hub.

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Be On Purpose! Be On Target!

FACE REALITY

I sent this email to the President of a company I am consulting with. See if it can help your thinking during the slow economy.

1. Whether or not the note comes due doesn’t change anything for the next few months. The money is still due and deserves a return. More investment money will only enable you to limp along longer without accountability.

2. The economy is not an excuse for 4 years of no growth and no profits. The purpose of every successful company is to grow and make a profit. The more sales and profit, the more valuable the company.

3. The sole purpose of a real company is not to sell it, but to grow it. Entrepreneurs grow companies. Small business owners own a company that barely makes them a living.

4. CEO’s of companies who don’t steadily increase the value of their stock and/or grow their revenue get replaced fast. No excuses. They make it happen or find another job.

5. The meeting we had was the same meeting we have had at least 4 times over two years:  

  • No growth and not profit.
  • No positive sales results.
  • Not enough sales activity or impact to attract new customers.
  • For whatever reason, you have not hired more sales people to close enough leads

As you know, I study entrepreneurs and small business owners. 95% of them get stuck and can’t grow beyond a certain level that leaves them short of successful. Good intentions, hard workers, work 80 hours / week, care about their product, and very convinced their way is the best and only way. But these 95% of all small businesses don’t move beyond the owner’s ability to control all the work. This keeps them stuck at a level they can’t get beyond. They don’t know what to do next except try to work harder themselves. They get frustrated when questioned because they value working hard over getting results. They never can find any good help they can afford. They are slow to hire new people who will help them grow the company. They don’t put strong people around themselves because they think they cost too much. They can’t let go, can’t delegate, and micro-mange everything that happens every day.

The only way to break the cycle is for the owner to change their habits or be replaced by another manager who knows how to manage instead of doing the work. For example, my friend has started 6 companies and eventually gets replaced or fired by the investors when the company gets stuck. With new direction and leadership, the company gets back on track.

Now what is your solution?
I DON’T want to Survive for another year. You have a great product that saves companies money. The economy is not the reason for the lack of sales. It is a lack of enough excellent and qualified people selling. You can’t do it alone with weak players surrounding yourself. You must reshuffle your staff to make way for at least 1 more fully qualified sales closer to get the revenue back on track. Time is too short to hope for a big deal or another loan to bail you out for another 6 months. I will close this rant with one of my quotes:

“The results you get are a direct indicator of the leader of an organization.”

It is time to face reality. What BIG change do YOU need to make (and your company) to get different results.