Team bonuses help to pull the team together. This is particularly helpful when you have teams that are pulling apart from each other. It can be used to address a particular problem or it can become a central part of everyone’s pay.
You can also give to competing or warring teams the same bonus structure and goals in order to force them to depend on each other and so bring them together.
Such a multi-team bonus is clearly going to be based on either divisional or company-wide performance, which has another benefit…
The John Lewis example of company-wide bonuses
Some companies, such as the John Lewis Partnership, have created unique methods of sharing profit with all staff. This method works well for John Lewis because it has been a founding principle of the company, and over many years, and with much effort, its existence and benefits have been communicated thoroughly to all partners.
Over time, such a commitment will have tremendous power with your teams – not least in that it will mark your business out as different from alternative employers.
However, young businesses may not get off the ground before this kind of bonus structure settles in – and therefore it is unlikely to be appropriate in the early pre-profit stages unless you choose to make staff/team involvement a key principle of your business and that has all sorts of new risks associated with it, such as a lack of control in the entrepreneur’s hands.
56.
Be wary of bonuses?
There is, however, another view: bonuses don’t work and have no place in business. If your business commitment is to excellence, then you simply manage the performance of the individuals closely and part company quickly if the performance is not up to scratch.
In the ideal world this is the perfect solution, but for it to be effective you need to have the facility to quickly and easily let your staff go. Again, this would point to the freelance and contract staff structure, or at least a structure in which you can fire staff without significant complexity or cost.
In such cases, you can simply agree the fee for the work. And pay top rates.
My view is that, in the early stages of a business, this simple non- bonus approach is the best. However, the error that many entrepreneurs have made, myself included, is that what suits a business at one stage will not suit it at a later stage. Never forget this.
57.
Use profit-share bonuses
Using profit as the basis of bonuses is hard to manage as it requires the explanation of your accounts in some detail to all members of your team and some just won’t understand this or trust the calculations. So the value of this kind of bonus depends on the kind of team that you have.
If you are predominately a white-collar business with team members that are highly educated, then this wider knowledge is a good thing and the use of profit as a basis for bonuses is generally a good idea, unless your team is entirely cynical. If you have a high proportion of mechanics working machines, then it is less likely that they will feel much personal connection with a profit-based bonus.
The key point is that, as any individual’s ability to influence the company-wide profit is limited, the relative size of this bonus to the overall package therefore needs to be modest.
The great thing about profit-share schemes is that they help build the sale value of the business (as a business’s value is a measure of its current and future profitability) whilst not costing anything up-front.
Now, there still remains a question about whether it is worth giving away hard-earned profit. Will this just be sharing a windfall or will the bonus structure ensure that greater effort and success are fairly rewarded? Remember, sharing profit with team members is about giving cash that is due to shareholders to employees instead. Why would shareholders agree to this?
Shareholders will agree if the bonus drives forward the profit generation of the business, which in turn, of course, increases the value of the business. Hence the payback is that shareholders would expect a higher sale value in the medium term.
Now, remembering that shareholders are actually interested in profit margin, if you can tie the bonus to profit margin then you are tying together the interests of shareholders, staff and business much more closely.
Lastly, shareholders might be more easily persuaded to share profits if they are based on an increase in profit (or profit margin).
Now, a bonus based on increase in profit margin will be even harder to communicate, but once a payout is made, you’ll galvanise the teams in your business to stretch for another bonus next year – and, suddenly, you’ll get a much greater engagement with the idea of how to increase profit margins.
58.
Pay out some profits as dividends for directors
A bonus structure that is based on a percentage of the shareholder dividend has lots of benefits – it creates a very inclusive atmosphere around the business and will benefit those team members who choose to stay with the company a long time.
However, it is no longer clear that long-term or career employees are quite the value that they were once thought to be, and they are unlikely to form part of a growth entrepreneurial company.
So, to make this work in the ‘here and now’ of modern business life, the business needs to make a commitment to pay out a minimum share of its profits as dividends – perhaps 25% or 35%.
This way, current senior staff can be sure that they will see some benefit of a bumper profit year – and that their benefits will be in proportion to those received by shareholders.