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Retail SMART |
Budgeting - Year-End
Bonuses |
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By:
Dennis A. Conforto
Chairman & CEO of A-Z Media Group, Inc. |
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For the month of November we have been discussing the entire
forecasting process that makes up budgets for the following
year. Today we are going to discuss forecasting your year-end
bonuses for 2005.
As the end of the year is approaching, a recent study is now
showing that small-business owners appear to be a little more
generous toward employees and customers than in the past.
This may be difficult for many scrapbooking retailers because
2005 was not a year of profit growth but rather a year of trying
to hang on to market share and matching last year’s revenue.
According to American Express’s Open Small Business Network
poll:
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1/3 of small business owners plan to give year-end raises in
2005 - up seven percentage points from last year.
- The South tops the list with plans for raises at
38%.
• 54% of small
business owners plan year-end bonuses for their employees – up
from 51% last year, and 43% the year before that.
- In the Northeast small business owners plan the
most bonuses at 56%.
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Other forms of reward and/or appreciation are on the rise as
well:
- Half of the owners polled plan to give holiday
gifts to their workers - an increase from 42% a year earlier and
33% in 2003.
- Holiday parties are also more popular, about 57%
of the businesses intend to have a holiday get-together this
year - an increase of 4% over last year.
The point is that most small business owners are having an “up”
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 retail clerks. First,
let me say there are as many bonus programs as there are people
to think them up; therefore, there is no industry norm or
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 the fact of rewarding the staff for doing
more.
2. The bonus should be based on rewards after the company has
met its break-even 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 break-even point of $45k. This would mean 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 to 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 for the staff 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 long to get the sales up and to motivate your
staff to make it so. It 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 profits dollars are compared to goal. By doing this you
motivate your staff to think like an owner, not like a retail
sales clerk. 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 for them would be $5,000 per month, or $60,000 for the year
if they can keep it up.
Practical matters - taxation:
Retail owners often struggle between recognizing income now or
in a later year when it comes to paying out bonuses. Most
employees want to be paid now and be taxed in a later year. As a
practical matter, however, an employee cannot defer compensation
after performing services and becoming entitled to that payment.
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 holiday as a thank
you for a job well done (This would be a modest bonus but the
extra money around the holiday is always appreciated by your
staff.). The other bonus 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… |
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