Smart Answers

How to Structure a Bonus Program


I'd like to set up a bonus structure for my fund-raising consulting firm that would encourage employees and subcontractors to help bring in business. New clients usually result in a year's contract that can be canceled with a month's notice. We're at a loss as to how to value the increase in revenue and what kind of bonus to give. Would a percentage of the first month's billings be suitable, or should we establish a fixed bonus for any new business, regardless of size? —L.S., Asheville, N.C. A bonus program can be an effective way to generate additional business through individuals who already know and admire your company and can be given the means to act as an informal sales force for you. But the key to a solid is to build in incentives that will reward quality contracts and do it fairly for your employees, subcontractors, and your firm. "Make sure you're rewarding behavior that leads to the attainment of your vision and goals for your business," says Lisa Van Fleet, partner and leader of the employee benefits and compensation practice at the law firm of Bryan Cave in St. Louis. That means identifying what kinds of clients you're looking to bring in and whether your focus should be on constantly signing up new clients or on maintaining long-term relationships with existing clients. If maintaining contracts over time is most important to your business, you might rethink your plan, or give out a second bonus for contracts that endure over some period of time. The Wrong People"The danger [of new-client referral bonuses] is that you'll get contracts with clients who aren't an appropriate fit for your services, can't be made happy, are short-term only, or maybe don't pay their bills. If you don't identify for your employees and subcontractors what your objectives are, you might end up with clients who want a two-week relationship rather than a three-year contract," she says. Along with defining exactly what kinds of new clients you are looking to sign, you'll need to empower your informal sales force, says Mae Lon Ding, a compensation and performance management consultant at Personnel Systems Associates in Anaheim Hills, Calif. "Train them on how to identify good prospects, approach them, and then make the handoff to the real sales people in the organization. [You'll need a] procedure for documenting the referral and making the introduction," Ding says. "It is also important to let employees know that you are not asking them to push an unwanted service. Tell them that they are approaching prospective customers in a spirit of helpfulness to the potential customer. Tell them that they should not be discouraged when it turns out that some potential customers show a lack of interest." Give your employees and subcontractors marketing materials that they can use to present your services in both electronic and paper form. "I also recommend that companies announce and celebrate new business that comes from referrals. This keeps the idea fresh in everyone's mind and encourages them that others have been successful, so maybe they can be successful too," Ding says. Vary It by SizeThere are several ways to structure bonus payments, so start with what makes the most sense for your business but evaluate the program and modify it if necessary, Van Fleet says. Jason C. Kovacs, compensation practice leader at WorldatWork, a global human resources association, recommends that bonus pay vary by the size of the contract, be paid out in phases, and be based on actual receipts, rather than billings, since those figures might be at odds given the ability for clients to cancel on a month's notice. Van Fleet suggests that the bonus should be tied to the actual profit that the contract signifies for your company. "Figure out how much of the revenue generated by the new contract represents profit and share that with your employee," she says. Ding, however, says providing a set bonus amount can be easy and also effective. "Give $50 for a referral to any prospect who meets specific qualifying criteria, combined with a $500 success payment for a contract signed," she says. If you'd prefer to give a percentage, that's up to you. "I have seen some firms giving as much as 5% of the revenue actually collected on a new business referral, and that is also good practice," she says. Kovacs suggests that you split the incentive payment into two parts, with the first part paid out after six months and the second paid out the year after the contract is fulfilled. This will help you achieve better employee retention, since the employee will need to be with your company in order to receive the payment. Clear CriteriaWhen it comes to subcontractors, Ding recommends different practices depending on their business relationships with your firm. Subcontractors who receive most or all of their income from you should get rewards similar to those you set up for your employees, she says. If your subcontractors receive only a small amount of income from you annually, however, consider giving them 5% to 20% of your top-line project revenue. "You may want to pay at the higher end if the subcontractor is bringing you work that he or she is qualified to do and could have potentially kept for themselves," Ding says. "You may also want to pay at this level if the subcontractor spent a lot of time introducing you to the prospective client, had a large influence on the sale and will receive little or no other income from the sale. Lower amounts or percentages might be more appropriate if they have no one else to refer the business to and they can't do the work themselves or they had a minimal role in influencing the sale." Finally, make sure you set up clear criteria for evaluating and tracking referrals and bonuses. "There could be bad feelings if you aren't clear up front," Ding says. "You will also need to consider reducing or eliminating the sales compensation for sales people in these types of referral situations, since you are in essence already paying a commission to someone else."
Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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