Retail SMART

Budgeting - Year-End Bonuses

 

By: Dennis A. Conforto
Chairman & CEO of A-Z Media Group, Inc.


dennisFor the past month, we have been discussing the entire forecasting process that makes up your budgets for the coming year. Today we are going to talk about forecasting your year-end bonuses for 2011.

As the end of the year approaches, a recent study revealed that small business owners appear to be a little more generous toward their employees and customers than in the past. For many scrapbooking retailers this may be difficult because 2011 was not a year of profit growth, but rather a year of simply trying to hang onto marketshare and matching last year’s revenue.

The point is that most small business owners have had an “OK” year in comparison to the off year within the scrapbooking retail community.

Several scrapbooking retailers have asked us how to create a retail-oriented bonus program for their employees. First, let me say there are as many bonus programs as there are people to think them up; therefore, there is no industry standard when it comes to retail store bonus pools. Having said that I would like to share my thoughts of what makes a bonus program work.

A good bonus program has four objectives:

1. It must be based on rewarding the staff for doing more.
2. The bonus program should kick in after the company has met its breakeven profit objectives.
3. Never cap a bonus plan; the more the staff achieves as a team the greater the reward should be.
4. The bonus program must be posted daily and rewarded at least monthly.

An Example

The following is a bonus program based on these four objectives:

In this example we are going to show a bonus program based on a retailer doing an average of $50k per month in sales or $600k in annual sales. The gross margin of this retailer is 50% with a store breakeven point of $45k. This would mean that with an extra $5k in sales, the company is making $2.5k per month in profits.

In this case I would recommend that the retail owner create a bonus pool that starts at $50k in sales and pays the staff 20% of the gross profit over $25k, which is the gross profit produced at that sales level. Let’s say the store under this program achieves $60k in sales. Based on a 50% gross profit margin, the gross profit (G/P) pool would be $30k, which is $5k over the G/P goal. When you apply the 20% bonus program to the $5k, the bonus pool would be $1,000 and the store’s profit goes from the average of $2.5k to $6.5k.

With this plan, the first three objectives are met. The trick is working all month to get the sales up and to motivate your staff to make it so. This happens by managing the details of your business - the average sale and the closing rate percentage all go into managing daily business daily.

In your back office create a chart showing what the sales and gross profit dollars are compared to goal. By doing this you motivate your staff to think like an owner, not like a retail salesclerk. They become part of the solution and help to motivate each other. You will notice that they will suggest ways to improve everything because it pays for them to think beyond the norm.

With this type of team approach to sales, imagine what happens when they learn that if they get to $100k in sales the bonus pool would be $5,000 per month, or $60,000 for the year if they can keep it up.

Practical Matters - Taxation

When it comes to paying out bonuses, retail owners often struggle between recognizing income now or in a later year. Most employees prefer to be paid now and be taxed in a later year. However, as a practical matter, an employee cannot defer compensation once services have been performed and they become entitled to that payment.

Therefore, employers who want to spare their employees from being taxed in the year a bonus is earned should not make any amounts available to the employee until the following year. This is particularly important if the employee earns a bonus based on an objective measure, such as corporate earnings.

And it is to this point that year-end bonuses come into play because they really should be based on company-wide performance for an entire year. In other words, you might want to consider having two forms of bonus plans: one for the holidays as a thank you for a job well done (this would be a modest bonus but the extra money around the holidays is always appreciated); and the other would be the year-end bonus which could be based, in part, on the program outlined above. Everyone wins, and that is what being business smart is all about.

If you would like to comment directly to Dennis about this article or have him address a subject matter in future articles feel free to email him directly at dconforto@a-z.com.