That’s what employees think when they don’t understand costs and profit. When you establish a standard bonus structure, employees learn about cost and profit. They care because it impacts their compensation.
Bonuses and profit sharing plans are put in place to reward managers and employees for helping the company achieve profits. Company owners “share the wealth” with those who have helped create it. Using the method described below, bonuses are not “the throw of a dart” or emotional decisions. It is a standard method that everyone understands…without emotion.
Bonuses and profit sharing are distributed two months after the fiscal year ends. They are distributed according to the program described below for managers and a separate program for all other employees. They are not distributed at holiday time because if they are distributed at holiday time, then employees look at the distributions as gifts and expect them – whether the company has a good year or a loss.
Bonuses are divided into two areas: manager bonuses and employee bonuses.
Managers Bonus Plan
Each manager’s department is individually evaluated to determine profitability. If profits are realized, the department manager will participate in sharing a percentage of those profits. The percentage of profits paid to each manager will be equal to the percentage of net operating profit (relative to gross sales) his department achieved (before extraordinary expenses*).
Net operating profit margin is defined as normal sales minus those expenses that the department normally experiences before bonuses and extraordinary expenses that aren’t a normal department expense (i.e. owner deciding to take a bonus).
Example 1–Department Manager A runs a department that nets a 10% net operating profit margin on gross sales of $600,000.00. This means that Department A had profits of $60,000.00. Department Manager A would then receive 10% of the profits for their department (in this case 10% of $60,000.00, or $6,000.00).
Example 2—The same department has sales of $600,000.00 and nets 15% or $90,000.00. Department Manager A would then receive 15% of the $90,000.00 or $13,500.00.
Employee Profit Sharing Plan
Employees are paid based on their compensation (hourly wage plus bonus or salary) and the number of years’ employment. The company owner determines the percentage of net operating profit to be distributed each year. Generally this percentage ranges from 10% to 25%. The remainder is kept for company growth, manager bonuses, and owner distributions.
Employee profit sharing is calculated according to that employee’s percentage of the total compensation and number of years employed for all employees.
Assume the following:
Employee 1: $20,000 total compensation; employed 3 years
Employee 2: $60,000 total compensation; employed 1 year
Employee 3: $30,000 total compensation, employed 5 years
The company total percentage is: (20,000)(3)+(60,000)(1)+(30,000)(5) = 270,000
Employee 1 percentage is 60,000/270,000 = 22%
If the total net operating profit to be distributed is $10,000 then Employee 1’s share is $2,200.
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