Picklefranz’s Bonus Pickle
At the end of every year, Larz Picklefranz, managing partner of architecture and interiors firm Picklefranz, Lordosa, Fauna, and Schlossenberger, got the blues. Maybe it was just that the holidays reminded him of his long lost dog, Blue, that he’d gotten for Christmas at the age of nine and kept all the way through college. But it was much more likely that something else was bringing him down, and Picklefranz was letting it get to him. It had to be the feeling he always got when the bonus program sucked all of the cash out of the firm at precisely the time accrual profits were the worst. Even though the firm had always done things that way to reduce their taxes, it just bugged the hell out of Picklefranz!
It just seemed there were so many problems associated with this bonus program that Picklefranz could no longer support it:
The firm always started out the year in the hole.
The big payday came during what was historically the worst accrual performance month of the year.
Neither the employees nor the firm’s managers had a clue about why they got what they did.
The process of deciding who got what took too long to administer.
So after this year’s meeting in the Bella Vista Country Club board room, Picklefranz asked the members of the executive committee— Paula Lordosa, Jenny Fauna, and M. Christopher Schlossenberger— if they thought it was time for a change. Of course, the cries of “we’ve always done it this way” came out, as well as “we have to make bonuses come at year-end or they won’t be big enough to mean anything to anyone.” Picklefranz quickly shot down both of these arguments. “So what that we’ve always done it this way! The process has always made me mad,” he said. “And we’ve always wasted a lot of time on it.”
“And if we have to make the bonuses annual or otherwise they are too small to mean anything, then maybe it’s time we dealt with why that’s the case!” Picklefranz roared.
So here’s the program they came up with:
Ten percent of cash-basis profits was paid out monthly to all employees. This money was doled out just like a profit-sharing program. Employees who had been on board a minimum of 90 days by the first of the month were eligible to participate. Each employee got a percentage of the pool, based on the percentage of the firm’s total salaries that his or her salary represented at the beginning of that month. Hourly staff were included, and their percentage factor was based on 40 standard hours. Principals were also included in this pool.
Ten percent of cash-basis profits was additionally paid out each month to the managerial group. There were 13 key managers, including the four principals. This pool was distributed the same way the “all-employee” pool was handled. Payouts were based on each person’s percentage of the total salaries of all those who made up the pool.
Forty percent of cash-basis profits was additionally paid out monthly to all owners. This money was distributed strictly based on percentage of stock ownership. The fact that Picklefranz, Lordosa, Fauna, and Shlossenberger was an S-corporation made this easy because tax obligations flowed through in strict accordance with ownership anyway.
Ten percent of cash-basis profits was allocated monthly to individual managers for use any way they saw fit. Each of the 13 managers got his or her share of this money to use any way he or she wanted. If someone didn’t spend it in any one month, that money carried over into the following month.
One of the keys to this new plan was the fact that any losses from the prior month had to be made up before a bonus could be paid, so it really reinforced the notion of getting bills out quickly and making every effort to collect. Both good things! At the end of the year, however, the slate was wiped clean, giving everyone a fresh start.
So how did it work? Really well. It was a piece of cake to administer. The controller and the payroll clerk handled the whole thing. Everyone knew what the rules were. It reinforced cooperation between individuals and the various work groups. It reinforced the idea that the firm should make money every single month, not just over the course of the entire year. It let everyone suffer if the firm did poorly and benefit when the firm did well.
How is your bonus program working? Are you happy with it? Or does the situation described above sound all too familiar to you? Maybe now, with the new year starting, is the time to change! And if you have any thoughts on bonus programs you’d like to share, send me an e-mail.
Originally published 12/31/2001.