Which Plan Should You Choose: A Discretionary Bonus Or Results Oriented Incentive Plan? Part 1

Damian Lang

How would you like to go to work every day and give it everything you have, not knowing for sure if you will get a fair return on your efforts? Even worse, how would you like to receive a bonus on how your boss feels you did this year, rather than actual company results?

Let’s start by defining “incentive” and “bonus” plans. I’ll also share why I prefer to use the term incentive plan instead of bonuses.

A bonus plan is decided and doled out based on emotions. It’s basically an unexpected gift, similar to what one would give a child at Christmastime.

The amount given is determined after the results are in, by a manager or owner who decides if the employee was good or bad this year. Then, said manager gives what he or she feels is fair to each employee.  It’s not only unnecessarily emotional for the employee (who isn’t sure what he is getting), it’s just as emotional for the manager (who has the fun job of determining what is fair based on the circumstances surrounding the employee’s performance).

An incentive plan on the other hand is developed before the year begins. It is designed based on the company goals and the employee’s potential to add value in achieving those goals. Incentive amounts are set for each employee based on predetermined metrics the company desires to achieve. And the employee is informed as to what he will receive based actual company performance, taking all the guesswork out of the equation for both the employee and the company.

I’m going to give it to you straight – if you work for a construction company, odds are pretty good that your bonus pay will fall under the former or the discretionary category. And that’s not good news for the employee or the company. Therefore, it’s my goal to make the case that every construction company should consider paying an incentive based on company results, not using a discretionary bonus model.

Not long ago, I asked a friend of mine how things were going at the plant he worked for. He said, “Absolutely terrible! They almost completely cut out our bonus checks and no one knows why. And now no one gives a damn about their job or doing the right thing anymore.”

Being so interested in incentive plans and his well-being, I prodded my friend further by asking if the managers have let him and his co-workers in on how his company is doing financially. He replied, “No. We haven’t the slightest idea. All we know is the managers can still afford their vacation houses, so we assume the company is making money.”

Does this story sound familiar?

Most company owners tell their employees, “If we have a good year, I’ll take care of you.” But what does that mean? That the employee will still have a job? That they’ll be able to provide the best Christmas ever for their family? (Are you envisioning the Grinch who stole Christmas right about now?) Or is it something in between? My guess is the, “I’ll take care of you” line will just leave employees confused and probably expecting the worst. And how will that translate into their work ethic? Probably not so good…

Let’s go another step further – what if the boss’s son wrecked his car the night before bonuses were to be doled out, and the boss needs to get him a new one? If the bonus is discretionary, do you think the bonus would go up or down? These are the same scenarios employees are running through their heads when owners offer them discretionary bonuses.

Could the solution be as simple as the owner/managers setting goals at the beginning of the year and basing employee incentives on those goals, rather than waiting until the end of the year and distributing bonuses based on what they think happened? I believe it can be.

At Watertown Enterprises, we pay based on three factors:

  1. Total Sales Collected
  2. Gross Profit -and-
  3. Net Profit

Paying our employees based on the talents they bring to the table helps us to increase these three very important metrics. In fact, it is so critical to our success that show them every month how each company is doing, and hand out incentive checks accordingly.

Our GP goals vary for each company based on the percentage it takes to hit 6% NP. For example, it takes 18% GP at our concrete/GC company, 20% at our masonry company and 25% at our manufacturing companies to come in at 6% NP.

YOU must decide what a fair incentive is for each employee up front, based on his or her ability to help the company achieve its goals. Then, let them know what they will be receiving as company goals are met. If you set your incentive system up properly, your employees will sleep better at night knowing what they will be getting as a return for their efforts and you will too knowing exactly what it will cost you as targeted company metrics are hit.

In the next part of the bonus versus incentive debate, we’ll talk about a quick way to determine if your incentive plan has been correctly designed and is working properly. Stay tuned!

Damian Lang owns and operates several companies in Ohio. He is the inventor of the Grout Hog-Grout Delivery System, Mud Hog mortar mixers, Hog Leg wall-bracing system, and several other labor-saving devices used in the construction industry. He is the author of the book called “RACE—Rewarding And Challenging Employees for Profits in Masonry.” He writes for Masonry each month and consults with many of the leading contractors in the industry.