New Venture Lab: Equipping Christian Entrepreneurs

Question

In November, I will become an absentee business owner.  A long-term and very capable employee will become general manager and take my place in the day-to-day management of the business.  Any recommendations on an incentive plan that will help keep my new GM focused on the right things to maintain and grow the business?  Should I share a percentage of earnings with him or how about a bonus formula based on earnings and sales increases?

Answer

There are many ways to tackle this need, but I have tended to use very simple bonus formulas where the business manager gets a percentage of the revenue growth and a certain percentage of the earnings growth (the earnings need to be well defined of course so there is no disagreement on how it is calculated.)  Using this type of structure I favor paying a base salary at "market" rates and paying a bonus on the growth as mentioned so they are well aligned with the owners.

An example of how this might work using round numbers is as follows:

Let's say the business revenue is $1 million and earnings are $150k and let's say that the market salary for the GM is $90k (which would be included in the expenses and therefore the $150k of earnings are real earnings.)  An example bonus might be 3% of the Revenue growth and 6% of the earnings growth, paid annually 60 days after the end of the year when the reporting is finished.  To continue the example, let's say that the company grew to $1.2 million and to $200k in earnings.  The GM's bonus would be $200k X 3% = $6k + $50k X 6% = $3k for a total bonus of $9k.  I would never cap that kind of bonus, but give the GM freedom to grow the business and benefit from that growth.  This way, the bonus is self-funded by the growth of the business.

In some cases, to retain the general manager, you may need to give him some ownership.  See an earlier post here on doing just that.

You may also want to consider a simple earnings share agreement (sometimes called lease management) where the GM's only compensation is 50% of the earnings.  This arrangement is sometimes used in a buyout (see earlier posts on that here and here), but it could also be used for management for a particularly entrepreneurial manager that is willing to be paid a completely variable compensation.