Bonus Plan Characteristics

1
Bonus Plan Characteristics
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Bonus Plan Elements

• The Plan should exhibit 6 characteristics
• Timely
• Significant
• Equitable/Fair
• Predictable
• Consistent
• Relevant to Enterprise Value Creation

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Bonus Plan Elements

• Timely
• Short term goals easier to measure and more
  likely to get near term attention from bonus plan
  participants
• Allows board/CEO to adjust targets quickly
  important factor in this fast paced environment
• Gives team multiple chances to win during the
  year
• Avoids lengthy idleness when bonus wont be
  acheived
• Paid out shortly after period ends (4 to 6 weeks)

4
Bonus Plan Elements

• Significant
• Meaningful enough to motivate behavior
• Generally in range of 20 to 50 in larger
  companies

5
Bonus Plan Elements

• Fair/Equitable
• Salary is for delivering expected results. Bonus
  is for achievement above expectations
• Bonus can used to highlight the importance of a
  particular goal or two
• Should be linked to objectives that each bonus
  plan participant can influence
• Ensure progress can be measured within the bonus
  period
• Necessitates segmenting long duration objectives
  like signing a big partnership
• Capped at some percentage of salary?
• Some allowance for hitting 90 of target?

6
Bonus Plan Elements

• Predictable
• Allows participant to link an objective to a
  specific reward
• Easily understood by the plan participants and
  the CFO. We dont want to be surprised by the
  payout
• Avoid subjectivity in whether the objective was
  achieved
• Ease of calculation eliminates discussion/haggling
  over bonus amount due
• Complexity is the enemy

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Bonus Plan Elements

• Consistent Methodology
• Employees want to learn how the program works
  once. Dont want to re-learn each bonus period
• Start out with simple construct to ensure big
  changes are not required down the road. This
  will increase sense of fairness of the program
• Changes in plan are often seen as take-aways.
  We want to minimize these

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Bonus Plan Elements

• Relevant to Enterprise Value Creation
• Establish important objectives each period
• Tied to things that matter to the building of a
  successful company
• i.e. sales, margins, recruiting, retention,
  product quality, customer satisfaction
• Early on, revenue should account for 2/3 or
  greater of the bonus. can be ratcheted down
  over time
• This is the most time consuming aspect of the
  program
• Heavy involvement by the CEO/comp committee in
  establishing goals each period and reviewing
  previous quarter results

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Participants?

• Start out with Executive Team
• Excluding VP Sales (already has a commission plan
• Consider adding Directors to the bonus plan once
  company achieves break-even
• Company wide rollout possible when it is
  consistently profitable

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Quarterly Bonus Plan Straw Man

• Timely
• Significant
• Equitable
• Predictable

• Quarterly objectives
• 25 of Quarterly Salary
• CEO to determine what is achievable
• Argues for simplicity this quarter

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Q4 Bonus Plan Straw Man

• Consistent
• Relevant to Value Creation

• Start with a few objective goals (can add more
  later)
• Sales/Margins should be heavily weighted. Will
  send loud message of the importance of these
  accomplishments