How to Build a Small Business
Bonus Plan

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7700 Irvine Center Drive, Suite 930  Irvine, CA 92618  949-852-2288
www.VLadvisors.com  www.PhantomStockOnline.com
Today’s Presenter:
Tom Miller
President
(949) 265-5700
tmiller@vladvisors.com
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Vision: Help Businesses Build and
Sustain a Performance Culture
Accelerate performance capabilities by designing
pay strategies that transform employees into
growth partners.
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If you do that…
• Quality of talent will improve.
• Employee engagement will expand.
• Performance will be magnified.
• Business growth will be accelerated.
• Shareholder value will increase.
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Today’s Focus
Bonus Plan:
 Premises:
 What makes a plan successful?
 Goals
 Metrics
 Communication
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If you don’t have a bonus plan . . .
 Either you don’t think you’re
ready
 Or you don’t have the
confidence you can do it
right
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Incentive Plan Denial
(for companies that do have a plan)
Two categories of companies :
 Those that know they have bad bonus
plans
 Those that think they have good plans
but actually have bad ones.
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The Data
World at Work 2016 Survey
Only 10% of responders indicated they
felt their annual incentive plan was
effective.
These responders were, generally,
representatives of larger, successful
companies. If large companies can’t get
it right (i.e., those with access to high-
paid consultants and experienced
executive leadership), what chance do
smaller companies have?

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VisionLink’s Experience
 Hundreds of plans
 Based on the standards embraced by major industries,
consultants, and HR professionals for nearly a century
 When examined—not proving effective (not improving
productivity)
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Why?
“…when financial incentives are
applied to increase…motivation,
intrinsic motivation diminishes. A
meta-analysis of 128 independent
studies conclusively confirmed this
effect.”
(“Stop Paying Executives for Performance,”
HBR, February 23, 2016)
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Hmmm…
 Traditional bonus plans
aren’t effective
 But you have a commitment
to your employees
 Can you simply raise salaries
and compete for talent . . .
and create a pay-for-
performance culture?
So, what are you to
conclude?
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Resolving the Paradox
Cause & Effect:
Most bonus plans fail
precisely because they
attempt to impact
behavior. The data are
complementary, not
contradictory.
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What to do?
Build a partnership relationship
with employees by sharing
financial value with those who
help create it.
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Promoting a Partnership Relationship
Key to:
1. Avoiding manipulation
2. Eliminating entitlement
3. Stimulating innovation and
stewardship
4. Creating alignment

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Premises, Premises
A premise is defined as “a
proposition supporting or
helping to support a
conclusion.”
One adopts a premise (believes
in a concept or principle) and
then acts in accordance with it in
the hope of achieving a certain
result. However, the desired
outcome can only be fulfilled
(presumably) if the premise is
correct.

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The Wrong Premise (the typical one)
Influence Behavior Through Careful
Selection of Plan Metrics
Reward your employees for achieving
results that are as close as possible to their
job duties. This typically includes the effort
to “select the best metrics” for each
employee or at least for every department.
Then assume that all the collective mini-
improvements will roll up into shareholder
value creation.
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Metrics Focus
8 Problems
1. Impossible to link every metric to true
value creation.
2. Multiple KPIs create confusion and sap
motivation.
3. A focus on behavior incentives can lead
to the opposite behavior.
4. Difficult to find metrics for every
position.
5. Results may be manipulated or
loopholes exploited.
6. Impossible to equalize metrics across
individuals and departments.
7. Unintended and unanticipated negative
consequences.
8. Pursuit of “perfect” metrics is a time
waster.

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Results, not Methods
"You cannot hold
people
responsible for
results if you
supervise their
methods.“
(Stephen R. Covey)
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The Right Premise
Reward employees for
achieving the
shareholders’ most
important financial
results and treat them
as growth partners.

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Change in Terminology & Mindset
Value-sharing instead
of paying incentives.
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Shareholder’s Most Important Result
Sustainable and growing
profitability
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Central Metric
(for funding the plan)
Focus on One of These:
 Profit
 Increase in Profits (% or $)
 (Sometimes: Revenue Growth)
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Not Just Profit but Productivity Profit
Productivity profit is
that surplus that can
be attributable to
the productivity of
your people, not just
your capital at work.

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Case Study
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Keith Williams  Assumed leadership of
UL in 2005
 Company carrying
considerable debt
 Losing market share
 Low employee morale
 UL had become
bureaucratic and “siloed”
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Core Changes Shift from “Incentives” to
“Value Sharing”
 Took away local measurements
driving management incentive
plans—all paid on same metrics
 “We live together and we die
together”
 Aligned everyone behind
company success
 “I call it ‘pay the company first.’ ”
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How do you apply this in a small co?
 Identify your most
important “profit” metric
 Select the threshold
amount of that profit that
justifies employee
bonuses
 Begin sharing value above
that threshold

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“Basically, up to the
company’s operating
profit target, all of the
profits go to the
company; and only after
that target is met, do we
start funding the
incentive pool.”
Example: If UL’s target is
$80 million--
 100% of first $80 in
profit goes to company
 The next $20 million
goes to the incentive
pool
 From there on, 50/50
between company &
incentive pool
Pay the Company First

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Pay the Company First
Once value creation is defined,
compensation can follow a formula
for sharing value in a way that
aligns key producers with the
company’s business plan and
priorities.
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Setting Payout Thresholds
 Base
 Target (budget)
 Superior
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Other Metrics
Minimum profit thresholds
must be met first. Then…
 Department or team metrics
 Non-correlated factors
(customer retention, customer
or client increase, etc.)
 Individual performance
metrics

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Org Unit Performance
 Overall company performance should be primary objective
 Org Unit performance can be a secondary objective
▪ Some of the best incentive plans in
the world are only tied to company
performance
▪ Org units should be utilized when
employee line of sight is heavily (if
not solely) focused on the org unit

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 Allocation to plan participants
contingent on:
 Company Performance – Employees
should have all or a majority portion of
their bonus based on company
performance
 Org Unit Performance – A portion of an
employee’s bonus can be allocated based
on department, location, division,
or business unit
Plan Weighting/Allocation

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Plan Weighting/Allocation
 Make overall company performance the
primary objective (e.g. ~60 - 100%)
 Organizational unit success should be
secondary objective (e.g. ~40 - 20%)
 Weight the overall incentive:

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Individual Performance
 Trend is to disconnect performance from incentive pay
 Performance Management is still important
 Managers more likely to be honest about performance if
incentives are not directly correlated to performance
rating
 If performance is deemed “Unacceptable” discretion
should be utilized to eliminate incentive payment
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Headlines
Performance
Management
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Plan Discretion
What about employees who made
special contributions over the
course of the year?
 Create a discretionary reserve
inside of plan funding
 Reserved for “exceptional”
performers only
 Often held at the top of the
organization (not cascaded
down to individual managers).
 Nomination process.
 Don’t wait until the end of the
year to recognize performance.
 Essentially, these are funded
“spot” awards

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Is the “Right” Premise Always Right?
Exceptions
 Sales Compensation
 Project Specific
Incentives
 Time Periods or Projects
with no Projected Profits
 Revenue Instead of
Profits

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Remember the Core Principle
The core principle behind
the right premise is to avoid
trying to micromanage
behavior through an
incentive program (“do this
and you get that”).

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Let’s Restate the Principles
behind a Successful Plan
 Adopt the Right Premise
 Treat employees like partners
 Focus on outcomes, not behaviors
 Trust and engage
 Don’t over-engineer through key performance
metrics (a sure indicator of failure)
 Build the Funding around Profitability
 No payment if Base not achieved
 Emphasize Target and Superior
 Use Org Units as a Secondary Component
(if you use at all)
 Use Individual Performance Prudently
 Reflect employee performance in the merit program
 Allow for some discretion in the value-sharing plan
 One last very important thing (see next slide)
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 Crucial to the success of the plan
 Employee communication
statements should communicate
incentive target opportunity
 Regular performance updates
during the plan year
 “Partners” understand basic
company performance
 Private companies don’t typically
disclose all financial information to
all employee “Partners”:
 Financial performance in private
companies communicated via
percentage against target
 “After Q1 we are tracking 95%
against our ‘Target’ financial
performance”

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Reinforce Line of Sight
Rewards
What’s in it for
me?
Vision
Where?
Strategy
How ?
Roles and
Expectations
My Contribution?
Rewards
What’s in it
for me?
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Market a Future that’s Relevant
 Communicate desire for a growth
partnership
 Demonstrate commitment
 To the future business
 To key contributors
 Promote, don’t just communicate
 Be consistent
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Market a Future that’s Relevant
 Here’s our future
 Here’s how we’re going to get
there
 Here’s the role we picture for
you
 Here’s how we encourage our
people to grow and contribute
 Here’s our philosophy
about pay and rewards
 Here are our specific
pay programs
 Here’s how our pay
programs could work
for you if we achieve
our plan
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Employee Value Statement
Year 1 2 3 4 5
Targeted
Results
100% 100% 100% 100% 100%
Salary $160,000 $166,400 $173,056 $179,878 $187,177
STVS $64,000 $66,560 $69,222 $71,991 74,871
LTVS
(EOY)
-- $74,000 $186,000 $311,000 $448,000
401(k)
@7%
$17,120 $36,123 $57,169 $80,428 $106,086
Total
Cash
$224,000 $232,960 $242,278 $251,970 $262,048
Wealth
Accrual
$17,120 $110,123 $243,169 $391,428 $554,086
Total
Value
$241,120 $567,083 $942,407 $1,342,636 $1,767,343
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Chronology for Building a
Successful STIP
1. Follow the Right Premise by establishing a basic plan approach
(scope, funding parameters, company only or departments)
2. Select your participants and organize them by group (tier or level)
3. Create a budget (total value of the pool at various performance
thresholds); allocate pool levels by employee tier
4. Assign your metrics (the Key Performance Indicators that produce
awards)
5. Allocate employees’ awards between company and business unit
results
6. Study, test, and confirm values
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Vitals for Operating a Successful
Short-term Incentive Plan
1. Communicate the plan details early and often
2. Demonstrate the plan value opportunities on an individual basis
3. Reveal plan progress throughout the year (at least quarterly)
4. Create plan “rules” and live by them
5. Be flexible and recognize special contributions periodically (keep a
reserve)
6. Review and renew the plan quickly at the end of the year
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How doesVisionLink help?
We employ an
interactive online
tool and teach you
how to use it.
We show you how
to communicate
and manage the
plan effectively.
We build your
plan with you
(as a DesignTeam).
How Does VisionLink Help?
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www.BonusRight.com
www.BonusRight.com
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What will it do?

5151
Indicate on survey if you
would like more
information including a
demo.

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Today’s Presenter:
Tom Miller
President
(949) 265-5700
tmiller@vladvisors.com
7700 Irvine Center Drive, Suite 930  Irvine, CA 92618  949-852-2288
www.VLadvisors.com  www.PhantomStockOnline.com
ThankYou!
7700 Irvine Center Drive, Suite 930  Irvine, CA 92618  949-852-2288
www.VLadvisors.com  www.PhantomStockOnline.com  www.BonusRight.com