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From time to time, On the Level will feature experts in a particular field or specialty contracting service. Here, Mike Lysecki of The Landscape Management Network – a member-based suite of software, tools, systems and education to help landscape contractors increase productivity and profits – explains how to create an effective employee bonus system.

As an owner, you get paid when your business succeeds so you have an incentive to work hard. Employees, however, get paid hourly, so they might actually be motivated to work slower. Establishing an effective bonus system can help increase productivity and profits by making your employees think and act like owners.

Your people should share in the same risks and opportunities that motivate you. While employee wages are fair compensation for work invested, to truly build a business where employees think, act and make decisions like they own the company, your employees must be motivated by company performance and productivity – just like you, the owner. The key is to tie employee productivity and overall performance to a bonus system.

Here are the 6 steps to creating an effective bonus system, based on employee performance:

Step 1: Start with a budget

You need an operating budget to plan for bonuses. Your budget sets the basic expectations for the company: what you need to sell, how many hours you have to complete the work, your overhead expense limits and, of course, a plan for company profit.

When your company (field staff, office, and management) all pull together to exceed the basic expectations for sales and profit, everyone shares in the reward. You don’t have to open your books to your employees, but you need to motivate them with some basic information. And remember, bonuses shouldn’t be “expected,” they should only be the result of exceeding expectations!

Step 2: Create a pricing system

Use your budget to set profitable sales goals and an overhead recovery system to price your work. Your operating budget will give you all the information you need to set up a profitable and effective bonus system. Using your budget you can calculate:

• What you need to sell

• How many labor hours you have to do the work (your productivity rate)

• What your equipment, material, and subcontractor budgets are

• Your overhead budget

• A target net profit

• A pricing system that’s specifically calculated for your company’s overhead and net profit

Step 3: Price your work accordingly

To be profitable, your job prices, or estimates, need to be tied to your plan for profit. Use the pricing system calculated by your operating budget to price all your work. That way, you’ll ensure your pricing accurately covers your costs, your overhead and your profit.

Step 4: Pay for performance

Use your labor ratio from your budget to help set appropriate wages based on sales goals. Foremen who can drive more production (sales) should be paid more than those who don’t drive as much. Your budget will tell you what field labor ratio is profitable for your employees. Your crews’ wages, and their production (sales) goals, should be tied together. Each crew should have a profitable sales goal, based on the cost of their wages. Your job is to sell enough work. Their job is to bring it in on time and on budget. You don’t need to share every number in your company – keep it simple. Sales, a labor ratio, and an overhead ratio are all you really need.

Step 5: Work to achieve your sales goals as quickly as possible

Your crews should work to achieve and exceed their sales goals. But not at the expense of quality. Make sure your employees realize that waste and re-work has a huge impact on opportunity. While it is important for crews to beat their sales goals, they must understand that they won’t succeed if they’re stuck fixing past projects or dealing with the repercussions of an accident.

Step 6: When sales goals are exceeded overhead becomes bonus

If your overhead recovery is tied to your sales goals, your overhead costs are “paid” as soon as you hit those sales goals (assuming you’ve managed your overhead spending correctly). Any additional sales don’t need to “recover overhead” so that money can be used to pay employee bonuses instead. If your overhead is 20% of your sales, you can now use 20% of every dollar over and above your sales goals as “bonus capital” to reward crews/employees who beat their sales goals.

The bottom line

When your crews are working to exceed sales goals, while maintaining high levels of quality and safety, they think like entrepreneurs, rather than hourly employees. They have a vested interest in your company, they care about your company’s success – and they want their team to win – because they know they’ll share in the rewards!

Landscape Management Network (LMN) offers members the tools and the training to build accurate budgets, create profitable pricing strategies, and to link estimation and pricing directly to their budgets. For more information, go to www.landscapemanagementnetwork.com.

Do you have a system to motivate and reward your employees? What have been the results? Please post your comments below.