How to Structure a Team Bonus (Without Hurting Cashflow)

Imagine paying out a big bonus to your team while secretly panicking about making payroll. Yep, I've been there. That that was me. I once had to write a personal check just to cover a profit share bonus when my business was actually losing money. My team was obviously thrilled. But what they didn't know is that my poor planning was putting their jobs and the entire company at risk. It was a nightmare. And now I want to share the lessons I learned. So so that you never repeat the same mistake that I made. In this video, I'm gonna specifically show you how to create an incentive compensation plan that both motivates your team and funds itself so that you never have to stress about making those payouts again. I'm even gonna drop a link to a free incentive compensation calculator tool. The same one that we created, the same one that we use across all of my companies. Now, if you don't know me, my name is Ryan Deiss. My partners and I manage 17 companies across our $200 million holding group. So we know a thing or two about building teams, about managing cash, and about avoiding dumb mistakes. All great incentive plans have three traits in common. Number one, they need to be transparent. In other words, they need to be simple to understand and simple to calculate. It also needs to be aligned, which means it needs to encourage team behavior that matches the company goals. So we don't want an incentive plan that is pushing only for top line. We want, when we really want to drive profit margins. We need to make sure that whatever plan we put forth aligns the actions and activities, the motivations of the team with the goals of the company. And then third, and maybe most importantly of all, it needs to be self funded. In other words, the incentive compensation, the profit sharing, it needs to be paid out of new growth, out of new revenue, not owner proceeds. You should not have to go into debt to pay out a profit sharing bonus plan. It just doesn't make sense. Now let's break down the five steps to building an incentive plan that is transparent, that is aligned, and most importantly, that is self funding. Step number one, Set a profit trigger. Bonuses should only kick in and this is really important after a set profit threshold is met so that your company's basic non expense cash flow obligations are always covered. Businesses need to make a lot of payments because that don't necessarily count against profit. So for example, tax savings, capital investment, retained earnings for stuff like R and D or just building up kind of a safety net, debt payments. And most importantly, investor and owner payouts, including distributions to people like you, these are all examples of expenses, quote unquote, that hit your cash without necessarily hitting the bottom line of your P and L. And frankly, not understanding this is how I wound up cutting a really big bonus check when I was literally out of ca should have done was looked back at my profit over the previous 12 months and calculated how much of that was actually free and available to be shared. Had I done just some simple, quick back of the napkin math, I would have realized that I needed to set aside about $250,000 each quarter to cover my basic obligations to my stakeholders, including me. Yes, I wanted to keep getting a distribution and you should too. There's nothing wrong with that. So here's what you need to do next. Look at your P and L and use last year's average quarterly profit to set your trigger. For example, if it costs you $150,000 per quarter to cover all your basic tax reinvestment and distribution obligation, then bonuses should start as soon as the company hits $150,001 in profit and it shouldn't happen a penny sooner. Then review this trigger amount every 90 days and adjust it at least once a year. Not only does this ensure that you don't find yourself in a cash flow crunch like me, it also ensures you only pay bonuses on new profit, not existing profit. Step 2 Decide the share of Profit so now that you have a profit pool established, it's time to choose what percentage of that profit after the trigger will go into the bonus pool. Now, 10 to 20% is a healthy typical range, but I've seen some companies go as high as 50% depending on the number of employees included in the profit sharing pool and the number of other cash distribution obligations that need to be met. As a general rule, a motivating profit sharing plan will add an extra 5 to 15% over a typical employee's wage. Now, that amount can obviously be much higher for leadership roles and executive with large variable compensation plans. The point is, you want to make sure the share is high enough to be motivating, but not so high that it fundamentally changes someone's compensation beyond what would be fair and reasonable in the marketplace. Step 3 Determine who's in the plan. In other words, define who's eligible to be paid a profit share bonus once the distribution happens. Is it going to be the leadership team only? Is it the entire company? Is it maybe a hybrid? Now I recommend that you start with leadership and roll it out to everyone after a quarter or two. Once you've had a chance to see that the is achieving its goals. It's common in most of our portfolio companies for profit sharing to be limited to the senior leadership team only. And even the companies that do spread the wealth around, they still limit it to employees that meet basic performance standards. In other words, you can't be like on a performance improvement plan. You can't be essentially about to get fired. Step 4 Pick a payout method. So now that you know who is in the plan, it's time to decide how the pool is going to be divided. Now, some common payout methods include percentage of wage. This is the most common. If somebody generates more in salary, they're likely more valuable to the company, which means they're worth getting, it's worth paying them a little bit more out of the bonus tool pool. So that's percentage of wage. Another option is equal payout. As the name suggests, this is where everyone in the same pool, from the highest level leaders to the lowest entry point folks, get paid the exact same amount. Now admittedly, this method is really best for small, very flat organizations in general. I don't recommend companies go with a equal payout across the board if they're of any size whatsoever. The third method is a share based method. In this case, you're essentially granting shares in the pool based on maybe performance or tenure. It kind of functions a bit like phantom stock or phantom equity. You're basically saying, okay, you know, if we're going to say that there's a thousand shares out there, well, you know, maybe Jim's going to get 100 because Jim's been at the company for a really long time and does a really great job. So you're kind of allocating it in the same way that you might allocate equity without actually giving out equity. That's the share based method. And then lastly, we have the hybrid method. The hybrid method would be sort of any combination of the above options. So for example, fairly typical model I've seen is maybe 40% of the pool is equal payout and Maybe the remaining 60% is distributed based on percentage of wage or share based. Now our preferred method, the one that we go with probably seven or eight times out of 10, is the hybrid payout approach where 60% of the payout is salary based and the other 40% is equal. And we like this combination because it rewards both contribution and team cohesion. It kind of has this there's the me money and then there's the we money. Step 5 Choose the payout timing. Bonuses should feel regular enough to motivate but not so frequent that they stress cash flow or that they stress kind of the administrative function. And that's why we recommend quarterly payouts with a 20% year end holdback. So we're going to pay out quarterly, but we're going to hold back 20% of what would be paid out and we're going to distribute that kind of at the end of the year. Now why do we do this and specifically why quarterly? Well, in my experience, monthly may be motivating. People really like getting an extra check every month, but it requires a lot of administrative hassles. We also don't really love annual because while annual is easier to manage, it's kind of hard to get people motivated about a bonus that may or may not be paid out in 10 or 11 months from now. And also by holding back that 20% until the end of the year, you not only further protect your cash flow, but you also encourage team members who maybe they're thinking about leaving, maybe they're kind of considering some possible job offers, maybe they're thinking about taking an interview or two. You get them sticking around at least another quarter or two in the hopes and anticipation of getting that 20%. Who knows, maybe by then they get a promotion, they realize what they would miss if they if they left. So I really like it. All right, so that is our process and again, I want to be clear. We have a tool that can make it really easy to calculate all this stuff for you. So be sure to check the description for that. With that said, here's your action item for today. I want you to determine what is the profit trigger number. We want to make sure that up until X amount in profitability that stays in the company. But the first dollar over that, we're going to be okay to distribute it. And what percentage over that amount so that first dollar that comes out, what percentage of that would you feel good about sharing? My advice, Start small, track results, maybe even kind of run it on paper ahead of time. Then and only then should you look to scale it out across your team. Now look, if you found this helpful, be sure to hit subscribe. Be sure to share this video with a fellow founder, a fellow CEO, and check out my next video for more tactical tips and on how to scale your company without going broke or insane in the process. And oh yeah, again, don't forget to download our incentive wise compensation calculator. It's free and the link is in the description, so go check it out.