Developing a Bonus Structure
When consulting with an agency, we build a cost-justified compensation plan for them. The industry-standard compensation package is base salary plus commission. The challenge has always been effective organization. I will share in this chapter how I create a plan when working with clients.
Compensation Plan Guidelines
- Bonus plans paid on ?admissions? (contracted paying clients, not referrals)
- 25%?40% of total compensation is in incentives or bonuses
- Consider making different payor sources one of the measures or quotas (this may be important if you take the waiver program or other payors that offer a smaller or larger profit margin than ?normal?)
- Consider ?new monthly hours? as an added measure
- Pay smaller commissions on a frequent basis; we recommend monthly
- Cost-justify the compensation plan against expected revenue/net profit
- Set realistic goals
Key Data to Set Goals
You will need to gather the following information to create a metrics-driven plan:
- What is your ?composite client?? This is an average of all your clients for the past year.
- Average number of weekly hours
- Average reimbursement per hour of shift (or live in)
- Average length of service
- What is your agency?s net profit margin?
Example of a Cost-justified Compensation Plan
- 20 hrs per week of service
- 20 hrs x 4.3 weeks in a month = 86 hours/month
- $20 per hour average reimbursement
- $20 x 86 hours = $1,720/month
- Average length of service = 4 mos
- $1,720 x 4 mos = $6,880 total revenue
- Agency net profit = 10%
- $6,880 total revenue for a composite client x 10% = $688 total net profit per composite client
In this example, the net profit per composite client is $688.? With this information, how many of these clients would you need to justify your sales representative?? First, you need to calculate the total cost of the sales representative.
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Sales Representative Data Example (this is strictly an example with numbers; the salary and expenses will vary by organization and by market)
Target compensation?$60,000 per year salary plus commissions
- 12% payroll tax burden
- $7,200 per year
- $400/month car expense
- $4,800 per year
- $100/month phone expense
- $1,200 per year
- $200/month marketing expense
- $2,400 per year
- $250/month health insurance
- $3,000 per year
- Total ?All in? cost of the representative to the agency = $78,600 per year
Using the net profit of the composite client in the previous section:
- $78,600/$688 net profit = 115 admits per year
- Gross up by 10% for net margin = 11 admits/month (rounded up)
In this example, the representative would have to gain eleven admits per month to pay for themselves and achieve the gross margin expected by the agency.
Target Compensation Breakdown
In this example, there was a target compensation of $60,000 per year in salary and commissions. The breakdown of the compensation:
- $40,000 per year in salary
- $1,250 per month in bonus at 100% of quota achievement
- $1,250 x 12 mos = $15,000
- $5,000 in annual bonus when all the monthly goals are met
The combination of monthly and annual bonuses helps the agency through short- and long-term goals. The monthly goal and bonus help the sales representative focus on daily and weekly action items, while the annual bonus helps retain talent. Often, sales representatives will not ?leave money on the table? if they are considering a move.
Example Quota Achievement Payout
- 80% of quota = $625 in bonus
- 90% of quota = $937.50 in bonus
- 100% of quota = $1,250 in bonus
- 110% of quota = $1,562.50 bonus
- 120% of quota = $1,875 in bonus
Example of New Hours Per Month Quota and Bonus
New Hours Per Month (NHPM)?Scheduled hours in the FIRST week of service x 4.3 (avg weeks in a month). NHPM helps your sales representative focus on ?larger cases,? not just the two hours a week cases to achieve the admit the number of new clients.
- 10 hours in first week = 43 New Hours Per Month
- 25 hours in first week = 107.5 NHPM
- 40 hours in first week = 172 NHPM
This is not capped and can increase; follow the math logic.
Example of Quota and Achievement Payout?Quota
- 11 new clients a month
- 946 NHPM
- 86 hrs/average client x 11 new 946 NHPM to NHPM achieve quota
The representative achieves
- 9 new clients (82% of quota)
- 1,027 NHPM (109% of quota)
- 82% + 109% = 191% divided by 2 = 95.5% of quota
- Bonus is PAID at 90% level = $937.50
The composite client will need to be reevaluated every ninety days to affirm the compensation plan is still trending correctly.
Unintended consequences always occur in any compensation program.? By reevaluating every ninety days, you can make adjustments to your future compensation programs. If you are going to change your compensation program, we recommend that you do so January 1 unless upon evaluation major changes to your composite client have occurred that have been extremely detrimental to your organization.? Most sales representatives draw confidence from a stable compensation program, and we find that yearly changes are appropriate most of the time.
Once you have identified your monthly goal, ramp up the goal over a three- to six-month period to help motivate the sales representative while they are starting their career with you. In this example of eleven admits, you may want to consider ramping the goal starting with two or three and increasing it each month until your ultimate goal of eleven is achieved.
By Melanie Stover
