Show notes
“I can’t afford a bonus plan.”
It’s one of the biggest objections I hear from business owners. When you’re already paying wages, payroll taxes, and benefits, a bonus can feel like one more expense your company has to absorb.
But a purposeful incentive plan starts with a different question: What additional results could your team help create that would fund the bonus?
In this episode of The Bonus Podcast, I explain how to build a self-funded bonus pool around improved business performance. We start by protecting the profit your company needs to remain sustainable. Then we look at how to share a portion of the value your employees help create above that threshold.
I walk through a simple example: If your business needs $200,000 in profit and generates $250,000 before the bonus allocation, a 50/50 split of that additional $50,000 creates a $25,000 bonus pool while keeping another $25,000 in the business. That’s an opportunity for employees and owners to benefit from better results together.
We also explore where those improvements can come from. More sales are one possibility, but fewer mistakes, less rework, better collections, and higher-margin projects can all help your team create more value.
In this episode, you’ll learn:
- Why a bonus plan should be funded by additional success [00:26]
- How to establish a minimum profit threshold that protects the business [00:56]
- How a 50/50 split of profits above that threshold can fund a bonus pool [02:00]
- A practical example of turning improved performance into employee rewards [03:00]
- Ways to improve profitability beyond increasing revenue [03:53]
- Why arbitrary promises and revenue-only targets can create problems [05:18]
- How visible upside helps employees connect their contributions to their compensation [06:09]
Before deciding how much to pay in bonuses, identify the profit your business needs to sustain operations, support the owner, and prepare for future needs. Then consider which results your team could influence to generate additional profit—and how you could share that improvement.
A good bonus plan shouldn’t force you to choose between your employees making more money and you making more money. Designed correctly, it can create an opportunity for both.
Follow The Bonus Podcast for more practical conversations about creating employees who think, act, and care like owners.
Read the full transcript
00:00:03:18 - 00:00:26:08
Andrew Lamppa
One of the biggest objections I hear from business owners as to why they don't have a bonus plan in place, is because they say they can't afford one. Well, that's what we're talking about today. Hi, I'm Andrew Lamppa and this is the bonus podcast. Create employees to think, act and care like owners. So when owners here bonus plan, all they think of is one more payroll expense.
00:00:26:14 - 00:00:56:10
Andrew Lamppa
You have wages, you have taxes, you have withholdings. You have medical insurance. And there's one more bonus. And you and you may already think I pay them. Well, I'm supposed to pay them more. Well, that's not the way it's supposed to be designed. You see, a purposeful incentive plan is actually funded by additional success, additional profits, not carving up the profits that you already have.
00:00:56:11 - 00:01:16:09
Andrew Lamppa
We want to focus on where is the growth possible. And we're going to share some of the upside of that growth because you need to protect the business first. If there are no profits there will be no business. And that doesn't help anyone. So what you need to do is first decide what is the minimum amount of profit the company needs.
00:01:16:09 - 00:01:43:03
Andrew Lamppa
I call it a minimum profit threshold to cover owner draws, taxes, a rainy day fund, maybe a debt load. What? What's that amount? Decide what that is, because employees shouldn't get reward for hitting a target. That leaves the owner unable to pay the taxes, to reinvest, to replace equipment, to make a a reasonable return on their efforts to pay down debt.
00:01:43:05 - 00:02:00:19
Andrew Lamppa
You see, if the incentive plan is taken from those buckets, then the business isn't going to be sustainable. It's going to be at risk. So you need to protect the business first. But then once the business is protected now we can look and see what do we do with the excess. So I just want to go profit first.
00:02:00:19 - 00:02:28:08
Andrew Lamppa
Bonus second. But now let's look at the upside. So once the company is performing above this minimum threshold there's additional value to share. There's additional profits. You don't have to give it all away. I personally like a 5050 split where half of the additional profits go into the bonus pool and half goes stays with the company. Because you're you're sharing a portion of the improvement that the employees helped create.
00:02:28:10 - 00:03:00:19
Andrew Lamppa
And that's what causes higher retention, more motivation, higher performance, more engagement. One of the biggest frustrations of employees is they feel there's a massive disconnect between their level of content compensation and their level of contribution. They contribute this much, but they get compensated this much. And if you can bridge that gap with a purposeful incentive plan, you will get employees that stick around longer, that engage more, that work harder, that want to be a part of the company.
00:03:00:21 - 00:03:27:15
Andrew Lamppa
This is what happens when you have a bonus that's self-funded. If you if it's not self-funded, then there's times where you can't you can't pay it out. Or if by paying out you put the company at risk. So you want to keep it really, really simple in this regard. Let's say the company needs 200,000. Be sustainable. Well everything above that $0.50 goes or 50% goes into the pool, 50% stays with the owner.
00:03:27:18 - 00:03:53:10
Andrew Lamppa
Now, let's say you did a 250,000 in profit. Well, there's 25,000 sitting in this pool ready to be distributed, which is for another episode. How we distribute the bonus. But there's there's 25,000. So we don't look at that 25,000 as an expense on the L, even though technically, that's where it will go. We look at it as a a gain of the 25,000 above the threshold.
00:03:53:12 - 00:04:16:01
Andrew Lamppa
That's how you need to view it. You're viewing it as we're doing better and we're sharing the upside. You always want to be thinking, wow, it's the minimum we need to do. We need to do. And then how do we share in the upside now? You may be asking where where does that extra profit come from. Well it can come from obviously additional revenue, more sales.
00:04:16:06 - 00:04:49:09
Andrew Lamppa
But oftentimes it come from it comes from better performance, more billable work completed with the same payroll. Maybe it's better utilization or realization, less rework, less quality control issues, fewer mistakes. We're going after better, higher margin jobs because we've aligned our marketing to go after our ideal clients. Our collections are better where we've reduced waste. There's a number of ways not just working harder, where you can get more profits in the company.
00:04:49:10 - 00:05:18:19
Andrew Lamppa
And when you create a purposeful incentive plan, you can bring your team along for the ride and say, this is where we're at, this is where we want to go. And these are all the levers we can pull to get there. Now let's strategize together to see how we're going to get there. Because when employees have an upside for the work they're going to do, when they're going to go above and beyond, whether it's working harder or implementing technologies that you've invested in or figuring out what what work to do and what work to delegate when there's upside.
00:05:18:20 - 00:05:37:16
Andrew Lamppa
They're going to be motivated to do it. Now, what you don't want to do is pick an arbitrary number. Like everyone gets 2000. If we have a good year, that's not going to work. You don't want to promise a bonus before understanding what the business can actually afford. You don't want to say, if we do this, then we do that and you do this and you can't pay out that.
00:05:37:16 - 00:06:03:20
Andrew Lamppa
That will frustrate your team. Don't tie the bonus to revenue while ignoring if the revenue is profitable. I know a lot of companies pay out based on revenue, but sometimes profit can be variable. Maybe materials have went up, maybe expensive went up, maybe something else change where this higher revenue is actually not making more profits. Now you've promised based on revenue, but you don't have the profits to support what you promised.
00:06:04:02 - 00:06:09:11
Andrew Lamppa
Don't create a plan where employees hit a goal, and then they discover that there's not any cash to pay them.
00:06:09:14 - 00:06:37:09
Andrew Lamppa
part of the plan, always has to include achieving a profit threshold. Now, why do employees like this employee's aren't being asked to simply work harder for the owner? That's that's never going to fly. What what works is when there's visible upside, when they actually actually can see if this happens, if I do this, if I pull this lever, if I if we hit this objective, then I will receive that.
00:06:37:11 - 00:06:59:15
Andrew Lamppa
Their effort helps create the more more value. And that's why it becomes a perpetual machine. They participate in that value. And if the business wins, then they have the opportunity to win as well. One thing I really want you to take away is your bonus pool shouldn't start with how much money do I want to give away? Or how much can I afford?
00:06:59:17 - 00:07:21:15
Andrew Lamppa
You want to start with what additional result could happen to create the money to fund it? A good bonus plan shouldn't force you to choose between your employees making more money and you making more money. If you design it correctly, both should happen. I'm Andrew Lamppa and this is the bonus podcast. If you want employees who think, care and act like owners, follow the show.
Meet Andrew Lamppa
Andrew Lamppa is a business coach, former 25-employee business owner and founder of Built to Benefit.
Before coaching business owners, Andrew spent 14 years building and operating his own company, which was running at 4x his industry’s profitability and 8x his industry’s growth at the time it was acquired in 2018. Along the way, he became fascinated with a question many small-business owners struggle with:
How do you get employees to care about the success of the business without expecting them to act like owners while giving them none of the upside?
Today, Andrew works with small-business owners to improve employee ownership, performance, profitability and leadership systems.
The Bonus Podcast is where he explores one of his favorite pieces of that puzzle: how businesses pay, measure, reward and incentivize the people helping build them.