How to set up, and implement, a production-based bonus system.

Last month’s column explored a production pay system. We lightly mentioned using production as an incentive basis for management and support staff. Let’s explore that arena a bit further. First, let’s make sure we’re on the same page as far as the basics are concerned.

You may think you’re in the plumbing or air-conditioning business. These may be the products you offer, but if you’re going to be in business, you should be in the profit business. A business must earn profits in order to flourish. If a business isn’t profitable, it is dying.

When you hire an employee, his or her function is to help you earn a profit. Occasionally, as in the case of in-laws, for example, this standard is relaxed a bit but you’ll still have to make up the shortfall with the profits generated by other employees. Even employees in “nonprofit” organizations have to produce profits in order to justify their roles.

Likewise, the role of your support staff is to help your business earn profits. When you begin losing track of customer appointments, phone calls aren’t being answered in time, when work schedules are getting jumbled - you may hire a dispatcher to clean up the mess and get things organized.

But this is not why you hire a dispatcher. Your dispatcher is there to help the business earn a profit. He or she may eradicate seven layers of sticky notes from the office walls in order to accomplish his or her task of profitability, but that doesn’t change the fact that the main focus of the job is to help the company to be profitable.

In the service business, it is sometimes difficult to measure profitability on a daily, or even hourly, basis. It is especially difficult for production and support employees to track their profitability since they typically won’t know all the factors involved in your selling price. If, on the other hand, you have properly calculated the selling price of your production units, then your staff will know that the production, and profits, are on track simply by keeping up with the number of production units sold and delivered. When production targets are reached, your staff can enjoy the benefits every time your production professionals earn a bonus.

It is important that bonuses be calculated into your production cost. Otherwise, bonuses won’t be profitable for your company. For dispatchers and call takers, you might consider a fixed bonus for every truck that hits its production target. You should already have your dispatcher/call takers in your overhead budget, so the next step is to add a budget item to your costs.

For a simple example, let’s say you budget $10,000 per year for staff production bonuses and you have two office staffers. In your budget, you’ll factor in your wage burden so, for example, if your wage burden is 20 percent, then you would add $12,000 to your budget. Previously we had recommended using 1,000 annual production units as your standard, so if you have three trucks on the road, this added bonus level would increase your production unit cost by $4 per unit.

To calculate the production bonus for a staffer, you would divide your bonus pool by the number of staffers ($10,000/2 = $5,000 each), then divide the number of trucks ($5,000/3 = $1,666 per support staffer). Since each truck is responsible for 1,000 units in a year, the allocated bonus per unit works out to $1.66 each. In our sample company, a typical work week would include a budget of 20 production units per truck, so for every truck that makes its production budget, each staffer would earn 20 units worth of bonuses. Bonuses for one truck meeting the target would be about $33, but if all three trucks in our example hit the target, a staffer could pick up an extra $100.

As we mentioned last month, the world begins to revolve once the production goal has been met. The bonus quickly gets better when your producers exceed the budgeted production target because you can pay the budgeted bonus amount for each bonus production unit.

For example: With three trucks on the road, our example calls for a total of 60 units per week. Since you have budgeted for bonuses, you can pay the bonus allocation for every additional production unit delivered. Since all your overhead is covered in the initial 60 units, you could afford to make it more interesting by doubling or tripling the value of each unit over 60. At triple bonus, if the production crew turned in 65 units, then your staffers would each earn $5 per unit which would be an additional $25 (5 units x $5) in their pay envelope that week.

Production-Based Bonus Advantages

A production-based bonus offers several advantages. Although it takes a few paragraphs to explain how to set it up, this bonus is quite simple to measure and fulfill. Did the service professional achieve the production goal? A “yes” results in a bonus. “No” means no bonus. Those of you who have tried to track and reward close rates, service agreement sales and other inventive plans should appreciate this simplicity.

As your company grows, you’ll need to reexamine your bonus pool amounts but you may see that your staffers become more productive, forestalling the growth of office personnel. An office manager may look for ways to work more efficiently, rather than hire another warm body to split the bonus pool with.

Your service manager should get in on the game as well. I’ve seen manager bonus plans which focus on sales growth. “Give us 3 percent sales growth every year and we’ll give you a tidy bonus.” Growth is good but ultimately, it’s unsustainable. How long can a company continue to grow before it’s bigger than the market it serves?

A sales bonus isn’t necessarily a bad thing but sales numbers are somewhat more malleable (that’s code for “subject to pencil whipping”) than production numbers. This is particularly important because it is possible to sacrifice profits to increase sales. Sold production labor, which covers your overhead, produces profits even when it is sale-priced. You can put your labor on sale, pay bonuses for productivity, and still remain profitable as long as your discount isn’t greater than your profit margin.

Another bonus favorite for managers focuses on gross profit, net profit or both. “If you can deliver a gross profit margin of better than 60 percent, we’ll give you a big fat bonus.” Margins are important, to be sure. Profit, after all, is an important measure of business success. But sometimes the math gets fuzzy, especially if the company owner meddles with the financials for tax purposes.

If a service manager’s bonus is based upon production, the bonus qualification becomes very simple: If the production target is met, the manager gets a bonus. If not, no bonus. You’ll have the bonus figured into the operating cost of the business, so you automatically know that if you’re paying a bonus, you’re earning a profit. It’s difficult to get much simpler.

A production bonus promotes team work because everyone in the company is measured by the same standard. I have witnessed dispatchers “punishing” service professionals by sending them all over the map, rather than dispatching the most efficient route possible. This “punishment” may cost the service professional a few bucks but it can result in triple-digit punishment for the company. When the support staff earns bonuses for higher production, they’ll be more interested in accurate call data, efficient dispatching and better customer communication.

Customers call service businesses because they want service. A production-based bonus plan rewards everyone involved in the service process because improved customer service is the goal. Rewarding better service doesn’t automatically improve customer service but it does help sharpen the focus on the goal of more production, and more production means more customer service.

If you’d like to run some calculations for your company, I’ve prepared an online calculator which helps you see how to implement the system. Send me an e-mail for the link.