A better way to budget bonuses
Are you looking for a bonus pay system that is fair and sustainable? Start by incentivizing performance and encouraging cost savings.
When bonus pay becomes an end-of-year entitlement instead of a reward for a job well done and motivator for continued improvement, it’s no longer a bonus; it’s a gift. This year, consider an alternative program that is lucrative for hard-working employees and protects practice profitability.
A core value of the hospital I manage is to foster an environment that balances the needs of employees with the needs of clients, patients and the business. We want to share the practice’s success with our employees, not profit despite them. We also understand that being too generous with hourly wages and scheduling can have devastating consequences during lean times.
With that in mind, we guarantee that a specific percentage of hospital revenue will be spent on human resources expenses, including owner and employee wages, taxes, health insurance and benefits like pet care, IRAs, continuing education, uniforms and meals. We intentionally control our wage expense so we can provide fair and competitive hourly pay but at the threshold of a slightly below-average year. When our H.R. expenses are under budget, which should happen during any average or better year, we bonus out the remainder twice a year.
This money is a tool I can use to incentivize the type of behavior I hope our employees will exhibit. To reward loyalty to the hospital, our bonus system is weighted based on years of employment and hours worked during the period. This allows us to give our long-term, full-time employees a higher ceiling for annual pay without us having to commit to perpetual raises that may make a team member too expensive to employ should we have a slow revenue period.
We also give all employees the chance to work for a larger share of the bonus, regardless of longevity or job title. “Bonus bonus” opportunities include credit for:
- Attending a continuing education seminar and, during a team meeting, recapping what was learned.
- Responding to our monthly team meeting notes.
- Writing a blog for our website.
- Learning a useful skill outside of the job description.
- Completing deep-cleaning tasks during down time.
I have built in a negative consequence for going over budget on our cost of goods sold. I feel this is an expense the team has significant control over and, for us, one that is regularly too high. The goal is to keep our inventory on budget by invoicing correctly, minimizing shrinkage and promoting services. When we fail to accomplish this as a team, the overage comes out of the bonus pool and our profit margin stays on budget.
While our employees appreciate a bonus, it is easily forgotten when hourly wage discussions come up. To combat this, I regularly discuss why our hospital relies on bonuses instead of raises to put employees above the national average for pay in their positions. I also like to put their last bonus in terms of pay per hour, often at least a dollar or two, which helps build perspective.
What is important to me during inevitable down economic times like a recession, new competition or further fragmentation of demand is that we confidently continue to employ our team at regular hours and pay while we wait for normalcy to return. When times are good, we all prosper. When times are hard, we can weather the storm together.
Do a Little Investigating
A complication to this bonus system when compared to a simple percentage-of-growth model is the difficulty in projecting the dollar amount in a tangible way that employees can understand at a glance. I cannot say, “If we make X dollars this month, your bonus will be Y.” Instead, I first have to factor in expenses like commissions, wages and vendor bills. Factoring in these expenses is why I like the bonus system so much.
If revenue is up 10 percent, it is important to understand why. If the growth required 10 percent more manpower or a spike in low-margin inventory sales, the H.R. budget might not have room for bonuses. If we are in a heavy-hitting year for Drug Enforcement Administration renewals or have spent generously on team gifts, those expenses should be factored in before determining a bonus amount.
To find the revenue and expense information needed to determine bonuses, I use the profit-and-loss statement from the prior 12 months. I make sure major annual expenses like worker’s compensation, previous bonuses and bulk purchases of preventives are represented fairly for a 12-month period. I can then calculate bonuses payable in May and November and time them so that they are deposited ahead of summer vacations and Christmas shopping.
Putting It All Together
The H.R. budget we have settled into is 49 percent of revenue. Again, this includes all H.R. expenses as outlined above. An additional 1 percent allowance is made for pet care benefits that are ultimately not included on our income statement but are tracked in our practice management software.
Our cost of goods (COG) expense budget includes all drugs and medical supplies, preventives, diets, in-house and reference laboratory expenses, and retail products. In theory, this percentage could be as low as 22 percent. I will spare the excuses, but we have to work to keep ours below 28 percent, which is the current budget threshold I use for bonus calculations and will strive to reduce over time.
Our combined H.R. and COGS expense budgets from the income statement are not to exceed 77 percent.
Here is what the bonus system looks like using simple math:
Revenue over past 12 months: $1,000,000
H.R. budget at 49 percent: $490,000
Actual H.R. budget: $470,000
COGS budget at 28 percent: $280,000
Actual COGS budget: $285,000
Bonus pool (savings minus overage): $15,000
I divide the $15,000, allowing for percentage-based payroll expenses like taxes and IRA matches, among the team members using the weighted point system described above.
Ultimately, in this example, our annual H.R. expense would be 48.5 percent, our COGS expense would be 28.5 percent and our combined expenses would remain on budget at 77 percent.
Our team members would receive a nice bonus and our profitability would be protected despite inventory being over budget. The win-win outcome motivates everyone to do even better over the next six months.
Take Charge columnist Abby Suiter is practice manager at Daniel Island Animal Hospital in Charleston, South Carolina.