bonus, plan, company, payouts, tips, top, metrics, maximum payout, pay, measurable, realistic, employee, gross margin, number, year, align, hurdles, clear, talk, achieve
John Lund 00:01
Welcome to this edition of MYB2BCOACH Five Tips. Today I'm super excited to have Scott Fritz, a longtime EO friend of mine. He's an amazing businessman and facilitator. So, Scott, welcome to the Five Tips program. Looking forward to hearing your five tips. Why don't you tell the audience a little bit about yourself and then go right into your five tips.
Scott Fritz 00:23
All right, yeah, John, good to see you again. It's been a while. Yeah, like you said, we met when it was YEO wasn't even an EO at the time. We were a lot younger than but I started a company in 1997, called Human Capital. It was a PEO: Professional Employer Organization. So basically, we outsource payroll, HR benefit services to companies typically, on the 30 employee to 200 employee range. So you know, small sized companies. I grew that from ‘97 to 2007. Grew to 270 million, we were in 42 states and sold it in ‘07. And so well, now what I do, I started working with some clients. EOers, a lot of them and teaching them how to do what I did, which is how to build a business that you can exit and/or just let it sit there and be an ATM. And then I wrote a book called The 40 Hour Work Year in 2010. And all of a sudden, I had a bunch of coaching clients that wanted me to just kind of take them through how that worked and how I did it. So, since 2010, I've been doing business coaching, speaking and then I also do angel investing. So, I've invested in 38 different Angel deals last 20 years. So keeps my habit of business in check.
All right, so go right into the top five, that five tips. And as we talked about, you know, I wanted to leave everybody with some real meat and potatoes type stuff. So instead of talking at the 20,000 foot level, I'm going to talk today about building a bonus plan that works, that actually works. Because for those of you watching this, I know if you've done bonus plans, a lot of times they're way more complicated and a problem quite honestly than what you want them to be. So, the number one first tip is face financial reality. And what I mean about facing financial is, I'm always amazed at people who set up a bonus plan that they never even thought about, can they actually afford it? So they put these numbers together, they estimate how much they're going to pay out. And then they find out that oops, we cannot afford to pay out the bonus plan we created. So can we afford it? In my experience, it's the number one failure. Because if you can't afford the bonus plan, and things started going sideways, everybody's gonna sense that's involved in the plan that something's not right. And it's probably going to take the plan.
Keep it simple. I see this a lot with the financial roadmap of a bonus plan, you want to keep it very simple, I recommend two to four hurdles that need to be hit to pay out the bonus. And that's about it. You don't need some 27 page algorithm to calculate what the bonus payout should be. If you do cancel it, again, my experience, it will kill morale faster than anything you can do. Compensation is one of those things, we'll talk about that a little bit later, that you really don't want to mess with. So when you go into this face financial reality, and make sure it's something that you can actually afford and go through with. And the way I always my rule of thumb on this to come to make sure the bonus plan will work is a ten to one multiple on gross margin. So for every dollar we were going to pay out in bonus, it needed to be a $10 amount on the gross margin line. And that really pretty much kept us in line with being able to always execute on our our bonus points.
The second tip, it must pass the ARMD filter. John, you probably remember this from some of the old days and facilitation. So ARMD stands for Actionable, Realistic, Measurable and Dated. Alright, so it must pass this filter. Actionable: Can everyone involved participate in success? Again, I see this as a problem a lot of times, these bonus plans are set up and a lot of the people who were supposed to be participating and helping the bonus plan maximize payout aren't even involved in the process. You need to make sure it touches every part of the company that's involved. Are the numbers realistic, but still a strict? So R is Realistic. Again, this is not an automatic, it's a bonus. But they need to be realistic. I see a lot of times bonus plan numbers that are higher than any number by you know three times than they've ever done in the company and they want them to hit that and that's just going to kill the morale again.
Measurable: Is every aspect of the plan measurable with clear metrics visible to the entire company? So again, this isn't some secret, you know, Wizard of Oz behind the curtain thing. This needs to be very clear, very measurable metrics that everybody can see and participate in achieving Dated: clear defined dates for metrics, payouts, adjustments, etc. And the payout frequency needs to be defined. I know this might come as a shock, but you know, bonuses that are only paid out once a year don't usually get the results that a bonus that's paid out on a quarterly or even monthly basis. I'm not against an annual bonus plan, but you need to tier it into a monthly or quarterly plan. So people stay hungry and excited about what the bonus plan is. If you wait till the end of the year, it is just like a Christmas bonus, I don't believe there's nearly the impact is if you're making sure the frequency is more spread out over the year.
Number three, it must foster an Intrepreneurial mindset. So I love this word Intrapreneurial. It's thinking like an Intrapreneur inside the company, inside an organization. And basically what I mean here is the plan is focused on an owner not employee mindset. In most cases, your bonus is going to come off of a profit number or gross margin number or some level within the P&L that's not going to be sales. I don't recommend doing a sales-based bonus plan. I'm not going to get into that today. But you're asking for trouble. But as an owner of a business, you get paid at the very final day. I mean, if there's no, profit, you're not getting paid. So the bonus plan should mirror that kind of a mindset. The payout is based on discretionary effort, not tenure. I see this a lot too. So discretionary effort above and beyond. Remember, this is a bonus, this is a part of your normal compensation. This is not part of your your package that you get coming on board. It's discretionary effort. It's above and beyond. It is a bonus, not a salary or guaranteed pay. I see this again, I was on the phone yesterday with somebody, well, we're not gonna hit our numbers. But I'm going to go ahead and pay it out anyway. You do what you want, but that is not a bonus. If you're not hitting the metrics and not hitting the numbers. It's not a bonus.
It must foster creativity and collaboration. This is not something where you want people just like “Oh, I can just keep doing what I'm doing. And I don't need to work with other departments and I don't need to help this other person be successful”. You want creativity and collaboration, again, an owner intrapreneurial mindset. And then a little formula that I like I just put this on here. Ownership plus measurement equals accountability. I hear all the time from entrepreneurs, “My people aren't accountable, how do I make them accountable? How do I get them accountable?” Have ownership, have measured measurement, you will have accountability.
Fourth tip [the bonus plan] must be aligned to the company's top five priorities. Now, John, we know a lot about building out top five priorities. So you know, spoiler alert, if you're not building out your top five priorities every year, you really I don't think can have an effective bonus plan that works. So once you enter company's top five priorities for the year, you want to test the metrics and payouts against the top five. Is the bonus plan structured in such a way that those metrics, those payouts are going to be in alignment with your top five and help your top five succeed for the year? Will the plan accelerate the completion of the top five? I mean, the most powerful bonus plans out there will actually beat the dates that you've set for completion of your top five. Next, well, the updates. The top five should be aligned with bonus updates. So however you're updating your top five, I recommend monthly. But if you're doing it more frequently, I want to do it less frequently and at least do a monthly, those should align with bonus updates. So I would update your bonus progress along with your top five. And then lastly changes, the top five metric metrics must align. So if you need to change some metrics, some measurable wins in your top five, you then need to align those with the bonus plan. Don't change something in the top five and then not adjust the bonus plan because you're going in opposite direction. And fifth, and final. A great bonus plan that works creates loyalty and what are called golden handcuffs. Okay, so the idea here is that you're encouraging long term commitment to the company. Whatever the bonus plan is, it should waterfall or tier up off other things you're doing to encourage long term commitment to the company should not be a flash in the pan one and done program. The payout structure must match employee position. So what I mean by this is a C level, executive level bonus plan is not going to be the same as an hourly worker plan or a manager plan, or out in the field or out in the warehouse plan. You know, make sure that the structure matches the positions. Again, this you want to keep it simple but you want to put some thought into this because where you may want to be doing even some stock options or phantom stock to some of your executives, that probably doesn't ring a bell with people that are at the hourly level or newer to the company. Again, how do you create those golden handcuffs and create loyalty? You want to drive each employee to achieve maximum payout. So inside the bonus plan, there should be hurdles, I call them hurdles, or markers that you're going to achieve so that you can reach that maximum payout. And really what you're doing is creating the last one, healthy competition within the team. I love competition inside companies. Again as entrepreneurs as an intrapreneur, you want to become competitive. It's not a bad thing, It's a great thing.
So again, just focusing here. The five: Face financial reality, must fit the ARMD filter, must foster intrapreneurial mindset, must be aligned with company's top five, and increase loyalty and golden handcuffs.
John Lund 09:58
And then those are fantastic. It is a great set of five tips and I know people struggle with this all the time talking to business owners. Can you give us some examples of maybe what are some good ARMD hurdles are, the types of hurdles you think makes sense for most businesses?
Scott Fritz 10:13
Yeah, great question. So again, if you're looking at your top five, and this is where the alignment comes in. Let's say for example, one of your top five was to increase client retention for the year. So one of the hurdles, then would be a client retention number. So let's say you were at 88% last year, and you want to take 89%, the bonus could be 90%. So it's still a stretch, but it's realistic. But it's a bonus above and beyond what you're wanting to achieve with your top five.
John Lund 10:44
It's a great example. It's perfect. I like the real realistic versus trying to set it at 94%. And everyone knows it's not possible right.
Scott Fritz 10:51
Right. We’ve never done that in 10 years, or we're gonna do it this year.
John Lund 10:54
Yeah, exactly. Well, those are great tips. Thank you so much for sharing those and I wish you the best of luck and everything you're working on.
Scott Fritz 11:02
Cool, and you said to show my how to get in touch with me if you want to get in touch with me.
John Lund 11:08
People reach out to Scott. He's fantastic.
Scott Fritz 11:13
Thank you, John.
John Lund 11:13